Despite the saying, “cash is king,” there are pros and cons to using cash over credit cards in everyday transactions. Likewise, credit cards have their own share of advantages and disadvantages when it comes to making purchases.
Here’s what you need to consider when choosing cash vs. credit cards, and when you might opt for using one method of payment over the other.
Defining Cash and Credit Cards
Cash is the legal tender — whether coins, paper bills, or other notes — that you can exchange for goods and services. According to Merriam-Webster, cash is considered “ready money” in that you actually own the value of the cash and can use it immediately during a transaction.
Credit cards, on the other hand, can also be used to purchase goods and services. However, you’re borrowing the funds from a third party (i.e. a bank) to make your purchase today, with the promise that you’ll pay the credit card balance back later.
When to Consider Using Cash
Deciding whether to use cash vs. credit depends on your purchasing situation and preferences. Situations when paying with cash is preferred might include:
• Buying goods or services from merchants who only accept cash
• When your credit or income doesn’t qualify for a credit card
• Limiting your spending to a specific amount
• Keeping your personal information private during a transaction
• Avoiding credit card-related fees
• Avoiding credit card debt
You can also use cash to grow your money through an interest-bearing deposit account, instead of spending it. If you’d like to build your savings fund, you can only do so using cash.
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Benefits of Using Cash
Since cash represents the monetary value you actually have, it makes budgeting simple. If you have $100 in cash to spend for the weekend, for instance, you’re focused to make careful decisions in how you spend that finite cash amount. After you’ve depleted your cash, you can’t make additional purchases until you have more cash.
Additionally, cash provides some convenience despite its additional physical bulkiness in your wallet. For merchants, the benefit of cash vs. credit cards is that they save money on credit card processing fees. To avoid this, some merchants only accept cash payments, while others offer a nominal discount as an incentive for customers to pay using cash.
Cash can also widely be used by any consumer, regardless of their credit score. This makes cash a more accessible payment method for everyday purchases. It also doesn’t contain any of your personal data, so if a private and untraceable purchase is important to you, cash is beneficial.
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Drawbacks of Using Cash
The biggest drawback to using cash vs. credit, however, is that it caps your buying power to only the amount of cash you have. Although this can be a benefit as mentioned above when you’re on a budget, it can restrict your ability to make larger purchases today.
For example, if your car unexpectedly needs a repair that costs $800, but you only have $500 in cash to pay upfront, you’ll have to make a tough decision. You might be forced to shop around for a cheaper car repair shop, spend time negotiating a lower price with the current mechanic, or possibly wait on the repair until you have the additional funds necessary. All of this can cost you extra time, and possibly earning potential if you rely on your car to drive to work.
Aside from fixed purchasing power, physical cash is harder to trace between transactions. Your personal information isn’t tied to cash bills in your pocket. This means that if you lose it or it gets stolen, and it’s used by someone else, it’s harder to get back.
When You Might Consider Using a Credit Card
There are many use cases for credit cards, if you qualify for one. Some situations when a credit card might make sense include:
• Making a larger purchase now and paying it off later
• Breaking down a large purchase into smaller installment payments
• Earning points, miles, or cash back on purchases using a rewards credit card
• Unlocking additional purchase protections
• Building your credit profile
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Benefits of Using a Credit Card
Using a credit card as a payment method for daily transactions offers various benefits when managed responsibly. For example, if you don’t have enough cash for a purchase, a credit card lets you buy it now and pay it back the following month.
With a credit card, you get to choose how you’ll repay your purchases, whether in full when your billing statement is due, or incrementally over multiple months. The caveat is that letting a balance roll over to the next month incurs interest charges.
Since all credit card activity is reported to the credit bureaus, on-time payments and other factors can be favorable to building your credit history and credit score. A high credit score can help you qualify for competitive interest rates and terms on other consumer credit products, like other credit cards and loans.
Credit cards also offer benefits and rewards that cash doesn’t provide. Rewards credit cards let you earn points or miles that you can then redeem for travel, cash back, gift cards, merchandise, special experiences, and more.
Different credit cards can also offer benefits like travel cancellation protection, warranty insurance, and more. For example, some cards feature purchase protection, which replaces an item that was lost, stolen, or damaged, if it was purchased using the card.
Another major perk when using a credit card is that it limits your liability when unauthorized or fraudulent purchases or activity occurs on your account. Depending on when you report the unusual activity, you might only be liable for up to $50 of those charges. Some credit cards even have zero-liability policies.
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Drawbacks of Using a Credit Card
Interest charges, expressed as an annual percentage rate (APR), are one of the biggest disadvantages to using credit vs. cash. With how credit card payments work, unless you make full, on-time credit card payments each month, interest charges will likely apply to balances that roll over from one month to the next.
If you roll over a balance, you’ll not only pay more money toward your purchases, but your outstanding debt can snowball quickly. This can prove financially damaging to your everyday finances and to your credit if you fall behind on payments while amassing growing debt.
Certain credit cards also incur annual fees for the privilege of using them. This is money that you’ll pay out-of-pocket upfront. With a credit card, you can also incur other fees, such as foreign transaction fees, late payment fees, balance transfer fees, and more.
Is Using a Debit Card the Same Thing as Using Cash?
Using a debit card is similar to using cash. In fact, one of the biggest differences between a credit card and debit card is that debit cards draw funds from the cash that you already have in your personal checking or savings account. Still, a debit card provides the convenience of swiping or tapping a card on a payment processing machine, like a credit card, to process a digital transaction between your bank and the merchant’s bank.
However, debit cards carry many of the same disadvantages as cash. For one, a debit card limits your purchasing power to the amount that’s in your checking or savings account. Additionally, debit cards don’t offer the same level of protection against unauthorized or fraudulent activity as credit cards do.
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Understanding Your Spending Habits Is Key to Picking Which to Use
Taking stock of your buying habits can help you decide whether cash vs. credit is a better option for you. When considering these two payment options, think about the following:
• How much do you spend each month?
• How much discretionary income do you have?
• Where do you typically make purchases — online or in a brick-and-mortar store?
• Do you tend to overspend or stay within a budget that you can afford?
• If you’re thinking about a credit card, what’s your goal?
By answering these questions, you will likely be able to tell which payment method will be more convenient for you. For instance, if you’re trying to curb your spending, then cash might be the better bet, given how credit cards work. On the other hand, if you’re primarily an online shopper or you’re trying to build your credit history, a credit card could be worth exploring.
Cash helps you contain your spending to the money you actually own. This can potentially limit the amount of debt you’d take on through credit. It can also offer convenience when it comes to shopping through cash-only merchants. The caveat is the risk you’re taking on if the cash is lost or stolen since it can be difficult to get back.
Meanwhile, credit cards offer you peace of mind if your card is lost or stolen. They provide greater protection against unauthorized activity, including fraudulent payments. However, access to borrowed funds puts you at risk for getting deeper into debt if you’re unable to repay your balance on time each month. With responsible borrowing habits, however, credit cards can be a handy way to make purchases.
If you want the convenience and protection of using a credit card, consider a card that offers you cash-back rewards on every purchase.
The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1
Which is better when traveling, cash or credit?
When traveling, credit cards are a safer option to carry than cash. It can be difficult and near impossible to trace and verify whether lost or stolen cash belongs to you. If a credit card is lost or stolen, the card issuer can freeze new transactions on the account, and your maximum liability for fraudulent charges is $50, or nothing at all.
Are credit cards safer than cash?
Yes, credit cards are safer than cash. Credit cards reduce your liability in the event of unauthorized or fraudulent activity.
What is the difference between cash and credit cards?
Cash is a physical currency and liquid asset that provides you with purchasing power. When you use cash toward a purchase, you don’t owe that amount to another entity. Conversely, a credit card is a physical tool that lets you increase your purchasing power using borrowed money. You’ll need to repay purchases made to your credit card, possibly plus interest charges.
Cash or credit, which is more convenient?
Whether cash or credit is more convenient is subjective. For example, while many merchants accept credit cards, some only accept cash payments. However, as more businesses accept digital payments and transition to cashless transactions, a credit card might be more convenient.
Photo credit: iStock/Ridofranz
When you elect to redeem rewards points as cash deposited into your SoFi Checking and Savings account, as a statement credit to a SoFi Credit Card account, as fractional shares into your SoFi Invest account, or as a payment toward your SoFi Personal Loan or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.
1See Rewards Details at SoFi.com/card/rewards.
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