Some people charge every purchase on a credit card, while others use cash as much as possible. There are some situations where it’s a good idea to use credit, but you have to be disciplined to avoid getting overwhelmed by debt.
When to Use a Credit Card
For some transactions, such as online orders, paying with cash isn’t possible. You may be able to use a debit card that will deduct funds from your checking account, but a credit card issuer may automatically extend a manufacturer’s warranty for a purchase made using its card. A credit card may also give you better protection from liability in the case of fraud than a debit card will.
Many credit card companies offer rewards to attract and retain customers, such as points that can be redeemed for cash back, a statement credit, a gift card or other benefits. The rewards can be significant and you can earn them for buying things you were planning to buy anyway.
If your wallet gets lost or stolen, you can contact your credit card issuer, have the account closed, have a new card issued and be protected from liability for unauthorized charges. If a wallet full of cash gets stolen, you will simply be out of luck.
When to Pay With Cash
For day-to-day purchases, such as a daily cup of coffee, using cash can help you stick to your budget. It’s easy to make a lot of small purchases and not realize how much you’re spending in total. If you allocate yourself a specific amount of cash at the start of the week, you will find it easier to track your spending and know when to cut back or stop.
If you already have credit card balances that you want to pay down, you should avoid using credit cards as much as possible. It’s tempting to buy something on credit and worry about the bill later. Sticking to all cash can help you break the habit and get your finances in order. That can be especially important if you tend to make impulse purchases and later feel shocked and overwhelmed when you get your credit card bill.
Sometimes it may be possible to make a purchase with a credit card, but you will have to pay a transaction fee. You may be tempted to do that because of convenience or the opportunity to earn credit card rewards, but the cost of the fee may outweigh any other benefit.
If you’re planning to buy a house, you should limit your use of credit cards or avoid using them at all. Even if you were preapproved for a loan, a lender may reject your application right before closing if your debt-to-income ratio is too high.
Which Should You Use?
In some cases, it makes sense to use a credit card, though sometimes cash is a better option. Consider your lifestyle, goals and level of discipline to make the right choice.