Money Match-Up: Using Cash Versus Credit Cards

Here's the latest post in the Rockstar Finance Money Match-Up series where two money bloggers argue opposite sides of an issue. Today's issue features cash versus credit cards -- which is better to use? We'll begin with Michael Dinich from Your Money Geek who favors cash over credit cards...

Why cash is king and you shouldn’t use credit

Receiving travel rewards, miles, cash back, and points for the money you already spend is a great bonus, right? You may need to rethink your philosophy if you think you should use your credit card for every purchase you make. Credit encourages you to spend more and save less to acquire those romanticized rewards. You may think that companies are giving you rewards for an altruistic reason. However, they know that by enticing you with luxurious rewards, you will subconsciously spend more and potentially go into debt. Don’t fall victim to the villainous ways of the plastic lurking in your wallet. So, what factors do you need to be cautious of when expending your credit cards?

Using credit can put you in debt

Did you know Americans hold an average of $6,375 in credit card debt alone? If you are like most consumers, there’s probably been a time when you thought to yourself “oh, just this once.” Then one time turned into a $2,000 credit card bill with a 24% APR. Swiping your credit card can build a habit that can leave you financially devastated. The use of your credit cards can be addicting. If we put it in terms of gambling in Vegas, the house always wins. You always think you can pay for it tomorrow, well tomorrow never comes and you just continue to rack up your debt. When using cash, you never have to worry about exceeding your budget. If you spend all of your grocery money the first week of the month, you will probably feel some pain. Nothing changes negative habits faster than some pain.

Debt management

Have a mortgage? Have a car payment? Have student loans? If you struggle to manage your debt, credit cards can be poison to your wallet. Even with all of the incentives they offer, it cannot overshadow the high-interest rates they carry. If you are working hard toward a debt-free life, cash is the only way to go. It will force you to remain focused on your goals and not be blinded but the false hopes of a trip around the world. Note: your credit card would have to get a lot of use in order to reward you with a trip around the world.

You may get a deal

If you think credit card rewards are enticing, you may be able to use cash in a similar way. It costs companies to use credit. They not only have to pay a merchant fee but for small businesses, they have to rent a terminal and pay for fraud protection. If you intrigued them with a cash purchase, they could be motivated to give you a discount. Not having to jump through hoops to get your money, is appealing enough.

Likely to spend less

Witnessing cash leave your wallet is a bit more painful than swiping your plastic. You almost want to hold on to it as long as you can. This feeling encourages you to spend less. You may think twice about various purchases if you have a limited amount of cash you are working with. You are better off spending less and saving the difference anyways.

Less likely your identity will get stolen

Identity theft is on the rise because our information is everywhere. If you use cash for the majority of your transactions you are less-likely to get your identity stolen. Each swipe of your credit card increases the chances your identity being lifted.

Ease and convenience

You may think it is counterintuitive to say cash is convenient but think back to a time when you were able to use cash and leave a transaction with ease. Everything from paying for Girl Scout cookies to paying for dinner and including the tip is easier when you can walk away. When you use your card at dinner you must wait for the server to retrieve your card, swipe your card, and then bring it back. This can sometimes take a dreadful 10 minutes or more.

The bottom line

There are certain circumstances when using credit can be beneficial. And if used correctly they can yield great benefits. But cash should take precedence. It allows you to stay in complete control of your money and finance. You don’t need to worry about spending more than you have. Managing your money can be a challenge, why add more distractions than necessary? Your credit cards may be a part of the royal family, but cash will always be king! ------------------------------------------------------------------ Now let's hear from The Wealth Hound who prefers credit cards over cash...

5 Reasons Credit Cards are Better Than Cash

In a world fueled by consumerism, credit cards (and debit cards) are THE way to pay. Instead of carrying around wads of cash, you can take a single card and never have to worry about physically exchanging currency. There’s no change falling out of your pockets, no ATM trips, and there's no more wondering, where did that $5 go? In a fast-paced world, credit cards are king and quickly pushed the relic, cash, to the curb. So, why do some people still use cash? The answer is simple. A cash lifestyle can be a good way to get out of and stay out of debt. With a cash lifestyle, you can easily see how much you have, and you can't spend what you don't have. It's a simple concept, that works, and I would be foolish to write-off the cash lifestyle as a means to get started on the path towards financial independence. HOWEVER... I like to compare cash to a typewriter... If you had the choice between a typewriter and a brand-new laptop, which would you choose? Obviously, the laptop! While the typewriter once served its purpose valiantly, there's a reason it was replaced. Typewriters are bulky, analog, and unforgiving. Why would I use a typewriter when I can use a powerful tool like a laptop? Cash is like a typewriter. It works, but not nearly as well as credit cards. The inefficiencies are glaring. Credit cards make it extremely easy to track your money (vital for budgeting), offer security features, convenience, help build credit, AND last but not least, most credit card companies offer rewards when you use their card! FREE MONEY! For many people, credit cards are an incredible tool for building wealth and security in their life. But they're not for everyone. Merchants will try and get you to spend more than you can afford. You can play defense by employing the 4 cardinal rules of credit cards. That is, you must live by these 4 cardinal rules to keep credit cards on your side. If you don't, then cash may be a better choice for you :)

Be Disciplined
Never Carry a Balance
Use to Execute Your Budget
Make Payments on Time

** If you think you can follow these 4 rules, then let's dive into the 5 Reasons Credit Cards are Better Than Cash! **

1. Security

Credit cards offer consumer protection privileges that cash can't. If your cash is stolen, it's gone. Sorry, kiss it goodbye. Thieves and cybercriminals seek out opportunities to take your hard-earned money, and we should do our best to protect it. While your credit card may still fall victim, credit cards allow you to dispute charges and get your money back. Cash doesn't afford you that luxury. In 2012, my wallet was stolen and multiple charges were made on my credit card. Whoever stole my card went on quite the shopping spree, spending over $300! Fortunately, I was quickly able to put a hold on my card and dispute the charges. If my wallet would have been filled with cash, there is NO CHANCE I would have ever seen that money again. While debit cards offer some protection in the form of pin security, a criminal can still get their hands on your pin number! Just like cash, money spent on your debit card is as good as gone. I have peace of mind knowing my credit cards are designed to protect my money from thieves and cyber criminals.

2. Convenience

The convenience of credit cards is undeniable. Merchants everywhere make it easy for credit card users to swipe and go. There's no need to worry about counting your change or losing your coins under the car seat. Yes, debit cards offer similar convenience... However, debit cards don't offer any of the other benefits (rewards, security, credit-building, etc.)!

3. Build Credit

Regular and responsible credit card use is great way to increase your credit score and communicates to creditors that you are trustworthy! As a result, lenders will give you better interest rates for a large purchase, such as a home. If you ever plan to buy a house, your credit score will be important! Your score communicates how likely you are to be able to pay back the money the bank lends you. A higher score and lower interest rate could save you THOUSANDS of dollars over the course of a 15 or 30-year mortgage. Even landlords look at your credit score for rental homes. Having a good credit score could also help you get a job! According to a study conducted by the Society for Human Resources Management found that 47% of employers look at a candidate’s credit score during the hiring process. Secured Credit Cards are an excellent option for people with bad credit who have trouble getting approved for a credit card. If you have bad credit, credit card companies aren't likely to trust you with an unsecured credit card, so you put some cash down as collateral and you are given a credit limit commensurate with your collateral. ** Note: Credit cards can also DECREASE your credit score if you don't follow the 4 Cardinal Rules of Credit Cards **

4. Rewards

Almost all credit cards have some sort of rewards associated with them. In many cases, credit cards offer anywhere from 1%-5% in rewards and an additional bonus when you sign up. For my most recent card (Delta Amex), I was given over 80,000 Delta Miles which is enough for 1 or 2 round trip tickets, and I earn additional miles with each purchase. My favorite credit card (by far) is the American Express Platinum Card. For military members, American Express waives the annual fee ($550)! The card has countless rewards. Here's a few:

$200 statement credit for purchases from your airline of choice
Hilton Honors Gold Status
$15 Monthly UBER credits (one of my favorite)
Cash back rewards
Free TSA pre-check & Global Entry registration
+ MORE

I realize not everyone is eligible for this benefit, but I highly recommend military members (who follow the 4 cardinal rules) check out this card. For everyone else, there are plenty of other cards out there with no annual fees that have AWESOME rewards. I'm a big fan of cash back rewards. I'll take free CASH any day of the week. You can use your cash rewards to pay off your bill or have it deposited directly in your checking account. Here's an example of how credit card rewards can be a HUGE financial win: John and Mary have a credit card that has 2% cash back. They have $20,000 in annual expenses they pay with a credit card. That's $400 back each year in rewards. In other words, they'll have an extra $400 in their pockets each year. If John and Mary invest the $400, make the market average 8% return on their investment, and continue to invest $400 each year for 10 years, their credit card rewards will turn into over $6,000! Take that, cash lovers!

5. Great Tool to Execute Your Budget

A budget is a great way to be intentional with your money and to plan in order to meet your financial goals. A great budget will account for all income, monthly expenses, and savings. A credit card is a great tool to execute your budget and track your spending to make sure you are following your budget. There are a number of personal finance apps out there that will help you with this tracking! I use EveryDollar. Can you do this with cash? I mean, I guess you could if you wrote everything down. If you aren't ready to take on a credit card, there are a number of methods to track your spending. You can use a debit card and track in a similar manner or use cold hard and cash and track via an envelope system. In short, each envelope has a purpose (food, clothes, gas, utilities, etc.). Each month, you physically put your cash in the envelope and take it out when you need it. When the money is gone, it's gone. Pretty simple...

Credit Myth Busters

For some people, the 5 reasons credit cards are better than cash will still not be enough. They will try and convince you of the following: "You spend more with credit cards than you do with cash" This argument fails when credit card users follow the 4 cardinal rules! You can easily use credit cards to execute your budget and reap the benefits. If you are being disciplined and intentional with your budget, you will create your budget with your financial goals in mind. **Your budget shouldn't change whether you are using cash or a credit card, thus your spending will remain the same**

Caution

1. Watch out for annual fees: Many credit cards have an annual fee. If you choose a card with an annual fee, consider canceling it before the annual fee is due. In many cases, the credit card company will waive the annual fee to keep you as a customer. If they aren't willing to waive the fee, you should be prepared to either pony up the $100 for the annual fee (I have never done this, nor would I recommend it) or cancel the card. There are PLENTY of cards with no annual fee that also have great rewards… 2. Your credit score is based on a number of different factors, one of which is your average account age. You should keep this in mind when you sign up for or cancel cards. To keep my account age high, I have 2 cards (no annual fee) that I've had for 10+ years and cycle some other cards through to get the rewards. You can check your credit score for free on Credit Karma.

Parting Shots

So, what do you think? Are you in a position to put credit cards to work for you? All too often there is a negative stigma surrounding credit cards, but the truth is finally out; credit cards are far better than cash! These 5 reasons make a strong case as to why credit cards are better than cash! Like many personal finance topics, credit cards are yet another area where discipline is vital. As long as you follow the 4 cardinal rules of credit cards, you can reap the benefits and jump-start your path to financial independence! So, what will it be? Paper or Plastic? Ultimately, I hope you choose whatever works best for you, and whatever helps you achieve your goals. As you can see, credit cards can be a great tool to help you achieve your financial goals, but only if it works for *YOU*, and nobody knows you better than you! ------------------------------------------------------------------ So, those are the two sides of the issue. What do you think?