Should You Pay By Cash, Check Or Credit Card?

There are dozens of “gurus” offering advice on how to keep your financial house in order. Check out your local bookstore and you can find shelves of books and tapes and CDs on how to eliminate your debt. There are even those who advertise on TV with plans to help you cure your indebtedness (for a fee, of course). And since checks and cash are about identical, we’ll consider a “cash transaction” to be one involving currency and the little “negotiable orders of withdrawal (checks).”

But the question that has always been the hardest to answer is, “Cash, check, or credit card?” (At one time it was “Coffee, tea, or milk?” then it was “Paper or plastic?”) It is true the fastest way to get in over your head in your spending is the use of your credit card, but many of them now offer incentives (“rewards points”) you have to carefully analyze your circumstances before you make the decision.

Should You Pay By Cash, Check Or Credit Card?
Should You Pay By Cash, Check Or Credit Card?

Dave Ramsey answers the question, “Aren’t there positive uses of a credit card? Like rebates and airline miles? … [The truth is] Responsible use of a credit card does not exist. There is no positive side to credit card use. You will spend more if you use credit cards. Even by paying the bills on time, you are not beating the system! But most families don’t pay on time. The average family today carries $8,000 in credit card debt according to the American Bankers’ Association.

“Now let’s talk about the rebates. If you were using a credit card at 5%, you would have had to have spent $80,000 to get $4,000 rebates on new cars that lost $6,000 of value when you drove them off the lot. That is not a good deal!”

He continues, “If you ‛have to’ use plastic, I suggest a debit card. I use them for travel and the occasional convenience of ordering something over the Internet or phone. Other than that, I use cash.”

If you choose to make a purchase with a credit card, you can reduce the amount of interest you pay by paying more than your minimum payment each month. Or, if you are able, you can avoid interest on purchases altogether by paying your bill in full each month.

To help you with your weaning from credit cards, let’s explore some situations when using cash is a much better solution.

When you’re trying to stick to a budget

There are piles of studies out there comparing cash and card spending behavior, and they all came to the same conclusion: you spend more with plastic. Part of the reason behind this is the disassociation factor: you don’t feel as if you’re actually parting with money when you swipe your card at a terminal, especially if you don’t have to face the bill for a month. Ramsey says, “Flipping a credit card up on a counter registers nothing emotionally.”

Paying cash is the equivalent of a dieter’s keeping a food diary: it forces you to hold yourself accountable for what you buy over the course of a day. This is especially valid when it comes to small purchases, as the few bucks here and there on lunch, coffee and incidental purchases really add up. Using cash, it’s easy to see how quickly they empty your wallet.

When you’re shopping at a mom-and-pop store or a farmers’ market

A lot of Americans are working at eating and shopping locally today. You get the feeling you are helping out the little guy rather than funnel spending dollars to the big-box chain stores. That’s a commendable intention and one small-business owners and farmers certainly appreciate. But when you hand over your credit or debit card, you’re undoing some of that good intention.

Are you familiar with interchange fees? They’re those back-office charges banks slap on merchants who accept plastic. Here’s the short version of why they matter in this case: paying with plastic sends as much as 3% of your total purchase price to the banks instead of to your local dog groomer or florist’s bottom line. To make up that overhead, the seller usually has to jack up their cost to you. Naturally, if you don’t use a card, that price hike is gravy to them. Hint: If you see they accept credit cards, and you have the money, ask them for a discount for paying cash. You might be surprised.

When you’re at a flea market or craft show

Yes, more folks these days have credit-card readers like Square, but there are arguments to make for cash. First, there’s the point we made above about interchange fees eating into the profit these small-business owners earn from their sales. Second, it’s much easier to bargain if you have a handful of bills rather than a card. These venues are practically made for haggling, and as the saying goes, money talks.

Also, because of the increasing fraudulent use of card readers, they may soon come under closer regulation and not be as popular. It is very easy, also, to attach a “skimmer” device to the reader, allowing the capture and later unauthorized use of your card information.

When you’re buying something you might have to return

Store return policies vary widely; you need to check before purchasing an item you might return. (And by “check,” we mean going online or to the customer-service desk to read the store’s written policy, not asking a cashier who might be misinformed.) If you have your original receipt, many retailers will issue you a refund in the same format in which you paid. If you paid with a credit or debit card, this could mean waiting a few days for the transaction to clear. A cash refund, on the other hand, puts that money back into your pocket immediately.

When you’re leaving a tip at a restaurant

If you plan to come back to a restaurant in the future, your thoughtlessness may mean better service next visit. Depending on the restaurant’s policies, there could be a number of reasons cash is a better choice. The biggest perk a server gets with a cash tip is leaving at the end of the shift with cash in hand. Some places allocate tips left via credit or debit cards weekly; for people living paycheck to paycheck, getting that 15% in cash every day can make a difference. According to CreditCards.com, some eateries will even ding wait staff for the interchange fee on the tip portion of the bill, which can cut up to 3% off the total.

Some restaurants require all serving staff to pool tips, so if you got knockout service and want to make sure the person who did the work gets the reward, pay cash. We’ve even heard of managements that deduct from the pool “walk-outs” or credits, so the staff may not be getting everything they deserve.

There is a moral question here. The wait staff might be breaking house rules by just pocketing the tip. There’s also the potential that leaving cash tips helps wait staff avoid paying taxes on the money by not declaring it, but the IRS has been cracking down on this practice in recent years, so it’s less of a concern than it used to be.

(Editor’s Note: Lowering your dependence on banks – Maybe this is a personal choice, but as banks become less user-friendly and more predatory, lower reliance on credit cards is one way to level the playing field. Credit cards are a profit mill for banks, and when you transact without them, you’re reducing their money supply. – Kevin )

Now, looking at the other side …

Improving your “credit score” will definitely give you access to more attractive loans and financial services later on. You can charge purchases to your card and no longer need to carry a lot of cash. Also, you can reap rewards from your purchases, and choose from cash back, gift cards, travel miles, hotel stays, and more. But remember what Dave Ramsey said about how much you have to charge to get any meaningful rewards.

The hardest thing about using a credit card is keeping on top of the payments and the balance. Many people use credit cards to pay their bills, and then they struggle to make minimum payments. If you have bad spending habits, routine use of cash may make the most sense. For example, you can switch to cash only for just a few of your spending categories. These should be categories you spend the most on, whether it’s shopping for clothes, or expensive lunches with friends.

For years Dave Ramsey has recommended the “envelope system” of budgeting. After you find out the amount of cash you allot for yourself monthly, put the cash into a few envelopes, each representing a different category. That way, when you run out of your money for the month, you won’t be able to spend until the next month starts. However, it can be tempting to still splurge using credit cards because you haven’t kicked the habit altogether.

Keeping cash on hand can be a great way to avoid overspending. You can choose exactly how much cash you’re willing to spend, carry it with you, and stop spending when you’re out of cash. For some people, cash can “burn a hole” in their wallet meaning the temptation of easily accessible cash can lead to undesired spending. Carrying cash also carries the risk that it could be stolen. If these factors are concerns, consider using a debit or credit card, which in most cases offer you protection against fraudulent use.

Debit cards provide easy purchase tracking. Most are accepted at many merchants which makes purchasing convenient. Unlike a credit card, which requires you to pay the bill later, the money comes directly out of your checking account. This is a great way to avoid spending more money than you have available.

Before using a debit card, know your checking account balance. If you try to spend more than you have, your purchase may be declined or the bank might charge you an extra fee, also known as an overdraft fee. Recognize that certain banks don’t allow overdrafts on accounts, while others will. Fees and charges can add up quickly, and you’re not aware of them until you get your monthly checking account statement.

Also check your bank’s fraud liability protection program. Some debit cards offer protections similar to a credit card, so if your debit card is lost or stolen, you won’t be on the hook for fraudulent purchases. .

Time to take action: You are the one who makes the decision whether cash, debit or credit (or a combination) best suits your lifestyle and habits. Carefully consider the benefits of each payment method before making a purchase. Deciding your payment methods ahead of time can help you keep better track of your money, and you won’t be stumped at the checkout line when the cashier asks “cash,” “debit” or “credit.”

What do you use most often? Have you ever gotten into a financial crunch forcing you to make a change in your spending patterns? Share with us any horror stories of spending getting out of control.

( Photo by quaziefoto )

10 Responses to Should You Pay By Cash, Check Or Credit Card?

  1. I have a lot of respect for Dave Ramsey but he’s wrong about responsible credit card use. Someone who charges an item on the card and then pays off the card in full each month is responsible. The bill is paid and no interest charges are incurred. You can’t just ignore the people who do this and say that no one has the self-discipline to use a card responsibly.

  2. Hi Kathy – I have to agree with Ramsey in regard to people who have too much debt. Viewing credit cards as benign is a silent killer to anyone struggling with debt. They’re an enabler for millions of people.

  3. Kevin,
    With reference to your comment on lowering dependency on banks — yes, the big “mother banks” are growing more difficult to deal with. But if you have to have a banking relationship, consider exploring the many small community banks and credit unions available. Some are even paying interest on deposits now!

    But the real solution is developing your own self-control and discipline. Some people just need that little restraint of having to deal with an institution to get money rather than just dipping into a shoebox or lifting the mattress.

  4. Hi, Kevin and Kathy —
    I, too, have great respect for Dave Ramsey, having gone to one of his events years ago (before he hit the “big time.”) But I do think he goes overboard with the denigrating the use of credit cards. As I point out in the piece, sometime it may be more convenient (cash flow, for instance) to use them for major purchases. Just because someone uses them, then pays them off the next month, is no reason to make them or others feel as second class citizens. The key is “discipline.” That is the real secret. As with any “self-helpers” (including those of us a outofyourrut.com) everything said needs to be filtered through your own experience and expectations.

  5. Hi Bill – I agree, but we also have to keep in mind that credit cards involve a lot of marketing hype (rewards aren’t issued because banks love their customers), and people do fall prey to it. As a parallel, most of us agree that bars shouldn’t keep serving people who have had too much to drink, but that’s basically what happens with lending and credit. Borrowing is what’s encouraged because banks make money on it, and it “keeps the economy rolling”. But that’s a recipe for indebtedness, which has taken in millions of households.

  6. Hi, Kevin — Did you know American Express has a feature you can turn on through their website that will block any transaction over a set amount, you set the limit? It will also shut down your cards operation if the balance hits a pre-set limit? That’s kind of like the barkeep cutting you off. So there could be protections out there if people would insist on them and USE them, for goodness sake!

  7. If you had asked me about credit cards before I got laid off for the first time about 25 years ago, I would have told you credit card purchases would be the way to go. After being laid off that first time, I learn’t my lesson and paid off my 3 maxed out credit cards and cut them up. Now there are situations where you do need a credit card – no if and buts about it. For example, renting a car. Have not had to rent one since cutting up my cards and don’t plan on renting one. I now have a debit card for my bank once I decided to retire from check writing – too much issues about the security of them arriving in my mailbox. The debit card is a use when I have to. Other than that, it is cash. I went the debt free route after my first layoff as I did not expect it after 9 years at my company. Thank goodness I did this as the other 2 layoffs – I was prepared. I suggest when possible to live debt free which is a challenge as a lot of places will not rent to you or let you buy anything without some debt. A sad state of affairs indeed. Credit cards made it too easy for me to buy on impulse and take my time paying off the bill when it finally arrived. No more impulse buying for me. This way I am not stressing out about bills if I happen to lose a source of income.

  8. Hi, Angela,
    Wow, what tales you can tell! Does sound as though you have learned the lessons, the ultimate lesson, I hoped to convey in the piece. Consumers are getting soaked with credit card chicanery, and the banks are feasting on the money they wring out of the card users. I agree there are only a few instances when using a card is necessary. My complaint is with the “counselors” who try to make you feel like something crawling out from under a rock when you do have to use a credit card.

  9. Hi Angela – You did a smart thing getting out of debt the first time around. Unfortunately, the people most likely to get buried by debt are those who can least afford to carry it. Your story is an inspiration that we should never take debt lightly, even when things are going pretty well. Sooner or later they won’t be going well, and then debt becomes an unsustainable burden. That’s the central issue I have with credit cards and debt in general.

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