The Paying Cash Debate

One hundred dollar billCash or credit card or debit card? The debate continues...

The Credit Card Necessity 

Before you decide to get rid of all your credit cards, consider they are almost a necessity in this day and age. Besides helping with your credit score (FICO), which is used by insurance, employers, car loans, mortgages, and major purchases, you can pay off the balance each month without penalty. Also, they are handy in case of a dire emergency.

About  70% of credit card users carry balances; a lot paying very high interest rates. But even if you pay off the balance every month, what happens if you regularly charge $3000 every month (to get rewards points), then lose your job on very short notice? A good reason to have an emergency fund.

Places a credit card is needed or very convenient

  • Online purchases. Not every place takes PayPal.
  • Airplane tickets
  • Hotels
  • Car rentals
  • Business purchases

Paying cash can simplify life. We use a debit card every so often at the grocery store to get cash. As with most things, there are pros and cons to cash over credit.

Advantages of cash over credit card

  • Increased spending awareness
  • Tangible budgeting
  • Simplified financial accounts
  • Avoid unexpected fees and changes of services
  • Lower risk of identity theft
  • Harder to slip back into debt cycle
  • Tendency to spend more because of the rewards program
  • You are helping a store reduce expenses because they pay 2 to 3% (or more) to the credit card company for the privilege of using their services
  • Some services, such as many gas stations, give a cash discount

Advantages of credit card over cash

  • Convenience
  • Easier to track spending
  • Less risk for physical loss
  • Helps build credit history
  • Reward programs (someone pays for this. Nothing is free)
  • Select employers & insurance providers use credit scores
  • Able to contest charges

You can use a debit card instead of a credit card in most places. Still, many online vendors do not take debit cards. Also, debit cards have problems of their own.

Credit vs. debit card

  • credit: limited liability for theft. debit: none
  • credit: monthly balance. debit: none
  • credit: builds credit history. debit: does not
  • debit: only can withdraw what you have in the bank. Some banks do NOT limit this and will charge you with overdrawn fees. credit: up to your  credit card limit.

There is another way of online purchases: PayPal or Google Checkout. The best thing about using them is the limited exposure of your personal and credit card/bank information. 

Advantages of PayPal over a credit card (online)

  • Big advantage: using PayPal limits your credit card exposure to PayPal. No one else sees your credit card information when using PayPal to make a purchase. Identity theft recovery is no fun.
  • You can use eCheck to withdraw money from your bank account and directly pay a vendor. The vendor never gets any private information.

One of the big reasons for dumping credit cards is the way the banks have been treating their credit card customers (higher rates, cutting off credit without notice, onerous fees, ...). 

What to do

  • Consider getting a credit card through a credit union rather than a bank.
  • Cancel all credit cards that you do not use.

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