Cash vs. Credit Cards: Which Is Better?

by Steven Porrello

Source: Getty Images

It’s no secret: over the past decade, credit cards have become a strong contender in the great “cash versus credit card” debate. With contactless payments making point-of-sale transactions convenient — not to mention eliminating the spread of viruses and germs on physical money — most people have slimmer wallets with credit cards nestled snuggly and pockets no longer jingling with coins.

But we’re far from a cashless society. In fact, though the average Canadian prefers credit cards to cash, sometimes it makes more sense to pay with cash. So, before you decide on a victor in the cash versus credit card clash, let’s look at when it makes sense to use cash, as well as when it makes sense to use a credit card.

What are the benefits of cash?

Though credit cards have dominated the cash versus credit card showdown, cash hasn’t gone away yet. It may seem outdated, sure, but cash still has several advantages. Here’s why it makes sense to carry at least some cash on you.

1. It’s universally accepted

Though it’s becoming rarer and rarer for businesses to accept only cash, you’ll occasionally come across small businesses or local retailers who will accept only cash or debit cards. Similarly, they may require you to spend a certain amount to use a credit card, which can be inconvenient if you only want to buy one item.

In a similar fashion, you may find yourself buying produce or fish from vendors who only accept cash. Shopify and Square have certainly made it easier for local vendors to accept credit cards, but it’s not uncommon to find those that don’t.

Finally, cash can come in handy at events or concerts with “cash only” lines. Because most people pay with cards, you’ll find these lines to be shorter and more convenient to you. Similarly, if the power goes out, stores won’t be able to accept credit cards. In this event, you can whip out your cash and be on with your day.

2. Avoid transaction fees

When you pay with a credit card, retailers pay a small transaction fee to credit card companies. To balance out the fee, these businesses will sometimes charge you extra for using a credit card. Though most big retailers won’t charge you a processing fee, some small businesses and local retailers will, especially for small purchases.

Gas stations are notorious for this. Because the margins on gas are so slim (ever notice gas advertised in fractions of a cent?), you’ll often pay a higher price for gas if you use a credit card.

For these transactions, it’s helpful to have cash on hand. You’ll save a little money and you could do the vendor a favour, too.

3. Easier to budget

One area where cash crushes the cash versus credit card debate is the detailed budget. Paying only in cash means that once the cash is gone, that’s it — you’re done spending. This strict limitation can help you curb overspending, aligning your purchases more closely with your budget.

What are the drawbacks of cash?

Perhaps the biggest drawback of cash is that of liability. Unlike credit cards, which have fraud protection, cash has no insurance built into it. If you lose it, or someone steals it, you have to accept your losses or spend your afternoon searching for it. The fact that cash is easy to misplace and difficult to track down makes it riskier than credit cards.

Seconds, while cash can be convenient for small purchases from local retailers, it isn’t always easy to withdraw. For one, you have to find an ATM near you to get it out. Though Canada has thousands of ATMs, they’re not always located conveniently near you, nor do they always accept your bank card.

On top of that, ATMs have daily withdrawal limits. If you must withdraw more than the limits, you’ll have to find a bank. This can be a bigger inconvenience, especially if you’re trying to withdraw cash when banks are closed.

What are the benefits of credit cards?

There’s a reason Canadians prefer credit cards to cash — it’s super convenient to make cashless purchases on a card. Here are just a few other ways credit cards can gain the upper hand in the cash versus credit card debate.

1. Earn rewards

Perhaps the most gratifying reason to use a credit card over cash is to earn rewards, miles, or cashback on purchases. Nearly all cashback and rewards credit cards will offer 1% to 2% back on every purchase, with some of the best cards offering earn rates of up to 5% to 6%. If you’re already spending a lot of money on essentials — groceries, gas, utilities, clothing — you can end up accumulating an impressive amount of points.

Similarly, many rewards and cashback cards come with bonus sign-up offers that can give you a mound of earnings in a short period of time. You’ll have to spend a certain amount within a strict time frame (for example, $1,000 in three months). If you do, you’ll amass a ton of points right off the bat.

2. Get free perks

In addition to rewards and cashback, many credit cards come with built-in perks that can help you save money in a time of need. Perhaps the biggest perk is fraud protection. If your credit card (or information) is stolen, most credit card companies won’t hold you responsible for paying off what the fraudster charged. Most of the time, your credit card issuer will credit back the fraudulent charges, cancel the card, and send you a new one.

In addition to fraud protection, credit cards come with a slew of insurance, from travel insurance to rental car insurance to extended warranties on major purchases. You’ll typically get price protection too. This will help you save money when an item you bought goes on sale weeks or even months after you bought it.

3. Build credit

Having a credit card is one of the best ways to build a credit score. As long as you pay off what you charge, you can improve your score steadily over time.

A credit card can even help you rebuild credit. With a secured credit card, which requires an initial deposit, you can use a credit card with bad or poor credit. Use your card responsibly, and you’ll see improvements to your score.

What are a credit card’s drawbacks?

The biggest shortcoming with credit cards is debt and abuse. With a credit card, you could easily spend more than you can reasonably afford. Charging purchases to a credit card is relatively simple. With no restrictions in place, like a strict budget, you could amass more debt than you can pay off.

If you start carrying credit card debt — as in, you don’t pay your balance in full every month — you’ll start paying interest charges. Considering that most credit cards come with high APRs, usually between 20% to 30%, interest can put you deeper into debt.

If you miss credit card payments, things can get worse. You’ll likely pay a penalty fee along with a new penalty APR, one that is significantly higher than your card’s normal APR. Fail to make the late payment within 30 days and your credit card company will report it to credit bureaus, which will damage your credit score.

Of course, that’s only if you carry a balance or miss payments. If you pay off what you borrow, your credit card won’t damage your score or cost you money.

Cash versus credit cards: who wins?

At the end of the day, there really is no “either-or” victor in the cash versus credit card debate. They both have a place in your finances. Though credit cards offer convenience and rewards, you may not be able to use them for every purchase, especially if you shop at local retailers that don’t accept them. A credit card could also tempt you to overspend, which could lead to higher interest charges and damage to your credit score.

On the other side of the cash versus credit card argument, cash is pretty much universally accepted. While you won’t earn rewards on your purchases, you also won’t be tempted to spend more than you have. On the other hand, cash is a major liability. When you lose it, it’s gone: period. And in addition to missing out on rewards, you’ll also forgo free perks and insurances, not to mention fraud protection if your wallet is stolen.

Instead of looking for a champion in the cash versus credit card battle, try to find a way to fit them both into your spending. Use your credit card to build your credit score, earn rewards or cashback and take advantage of fraud protection and insurances. At the same time, keep a little cash on hand and use it when it makes the most sense.

And who knows? The power may go out, rendering point-of-sale machines useless. At that moment, you can whip out your cash, make a purchase, and continue without delay.

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