Which is better, cash or credit? Depending on who you ask, you will likely get a variety of responses. There are significant pros and cons for using both cash and credit. In some cases, the merchant will indicate which payment they prefer. But ultimately, the method you choose comes down to which option works best for you. Here’s what to consider.
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A credit score isn’t a static number and there are several factors that go into calculating it. The credit bureaus use their own proprietary algorithms and calculate their own credit scores. Equifax uses the Equifax Risk Score, while TransUnion uses the CreditVision Scoring Model. They are provided as guidelines to the issuer, which may take different factors into account, and approval is not guaranteed.
Evaluate Your Spending Behaviors
It is important to consider your spending habits before choosing a payment method. Paying attention to how and when you spend money can help inform which option may be best for you. Do you know when you are most likely to overspend? Do you find it easier to make a purchase on credit or lose track of where your cash was spent?
If you are carrying a large credit balance or struggling to stay on top of payments, sticking to cash whenever possible may help you pay down debt. Dave Ramsey popularized theenvelope methodencouraging people to use cash whenever possible.
Many people use credit cards regularly and rarely carry a balance. If you stay on top of your payments and pay your card in full, a credit card is probably a great option for you.
What is Accepted?
Depending on your location or the total amount of your purchase, some merchants may only accept one form of payment. Some merchants may refuse a card payment if the purchase amount is too low. And while debit cards are treated like cash in many circ*mstances, if a merchant refuses to run a card for a small transaction, you will need actual bills to complete this payment.
During the pandemic, the CDC recommended merchants “promote tap and pay to limit handling of cash.” In response, many merchants requested card only payments to minimize exposing their employees to germs. Those accustomed to cash purchases raised concerns about this practice, but the Bank of Canada says retailers are not obligated to accept cash and coins because “both parties must agree on the payment method.”
Often, your method of payment will be determined by the payment the vendor accepts. This could be especially true overseas, where more vendors are either cash only or limited in which credit cards they will accept.
The Benefits of Credit
Fraud Protection
Credit cards provide a unique level of security against fraud and loss. In Canada, if your card is issued by a bank and unauthorized purchases are made on your card, the maximum amount you can be responsible for is $50 (unless you demonstrated gross negligence in safeguarding your card, its information and other info like your PIN or password). If your card is issued by a federally-regulated institution other than a bank, maximum amount you’ll be responsible for is the lesser of these two options:
- $50
- the maximum amount set by your credit card agreement
Many credit cards offer zero liability protection to shield you from any financial responsibility. Similarly, if you notice charges on your statement that you did not authorize, report the charges to your provider. In many cases they will reverse the charge immediately.
With a debit card, you also get protection if you lose money due to technical programs or if someone uses your card (that is, if you reported it lost or stolen). Typically, the maximum amount you’re responsible for can’t exceed the withdrawal limits of your debit card. But you may be responsible for more if than that if your account links to a line of credit, one or more other accounts or if you have overdraft protection. To get a full reimbursem*nt, there are some conditions. For one, you must notify your card issuer (without delay) of any unauthorised transaction and if your card is lost or stolen. You must also keep your PIN confidential and never share it with anyone, even family.
Many credit cards also offer you the chance tofreezeyour card if it is out of your possession or you simply don’t want to be able to use the card without further thought. The feature protects you from purchases made without your approval to unfreeze the line of credit.
Purchase Protection and Insurance
Purchase protection is a free service that covers damage or theft of items purchased on your eligible credit card. Your card may also offer extended warranties, price protection if the cost of the item drops, or return protection allowing extra time to return merchandise.
Depending on your card you may also havetravel insuranceor auto insurance for trips or rental cars paid for on an eligible card. Note thatrental car insuranceis often a secondary insurance applied after your primary insurance.
Related: Best Credit Cards For Purchase Protection
Anti-Fraud Detection
Credit card companies use analytics to flag potentially fraudulent purchases. The goal is to prevent the need for a fraud report by stopping the transaction before it is approved. The algorithms use factors such as location and purchase history to identify transactions that fall outside normative patterns. Large purchases may also be flagged as potentially fraudulent.
The adverse side of this process is that it may result in a mistaken fraudulent concern when making unexpected purchases and your card may bedeclined. These errors are easily resolved by contacting customer service and verifying your identity and your intent to make the purchase. A declined card is always an inconvenience, but anti-fraud detection can alert you more quickly to a compromised credit card.
In many cases, the creditor will contact you to begin the process of placing a hold on your account and providing a replacement card.
Grace Period
You can use credit cards without ever paying interest. The period between the purchase and the due date is called a grace period. By paying the card balance in full each month, you avoid interest charges and can defer your payment for up to 30 days without paying interest.
Build Credit
If you have poor credit or no credit, a credit card is often an easy way tobuild credit. Store credit cards or gas credit cards are often accessible even with limited credit. If you have poor credit, asecured credit card, backed by a deposit, can still build your score.
Timely monthly payments comprise the largest category of your credit score. Even if you only charge a few items each month, regular payments to your credit card will boost your credit rating.
Rewards, Cash Back, and Bonuses
Many credit card providers offer rewards points or cash back on purchases as an incentive to use your card. While creditors are hoping you will carry a balance, reward points can be an excellent way to earn while you shop, especially if you don’t carry a balance. Some credit cards offer 3% to 6% back on selected categories. Other cards may offer 1% or more back on all purchases.
You may also find credit cards offeringwelcome bonusesif you send a certain amount within a stated time frame, often a few months. This incentive can make a huge difference in your budget. But make sure to evaluate your normal transactions and ensure the required purchases don’t exceed your usual spending.
Reward points can be redeemed for gift cards, travel or merchandise. You may also apply rewards or cash back as a statement credit. Just make sure to account for any annual fees when considering a credit card for its rewards potential.
The Benefits of Cash
Versatility
It seems like a simple term, but cash may be a bit more complicated. Obviously, cash refers to your paper bills and loose change. But your debit card, checks and electronic payments from a bank account are also treated as cash in many circ*mstances.
But not all forms of cash are universally accepted for purchases. Personal checks are often not accepted as payment in stores, but if you mail in a payment a check may be the only accepted form of payment. And while a debit card transaction and an electronic fund transfer both access the funds from your account, merchants may prefer one option over the other.
The variety of cash options allow you to purchase from almost anywhere—street vendors, online stores and large merchants. However, in order to access all of these financial products and services you will need to have a bank account and carry a debit card. Using a debit card can open you up to overdraft charges, so you may need to be more vigilant with tracking your spending.
If you plan to use only dollar bills, there will be a few more challenges. You will need to make more frequent trips to the bank and ensure you have small enough bills to prove correct change for friends or small vendors. You also risk loss if your wallet is stolen.
Cost Savings
When making payments for utilities, income taxes or car registration, you may notice a convenience fee for the use of a credit or debit card. In many cases this fee can be avoided when using cash, check or an electronic fund transfer. Be aware that some of these entities charge a convenience fee for the online payment service, as well.
Additionally, some merchants may advertise a reduced price for cash payments, commonly seen at gas stations. This is because retailers have to pay interchange fees (or “swipe fees”) to the credit card issuer on every transaction. In Canada, retailers are now allowed to pass the credit card interchange fee onto the customer, which can range from about 1% to as high as 3%. So, if paying in cash means you are regularly saving 2% or 3% on your tank of gas by paying in cash, those savings can really add up.
Finally, cash purchases do not accrue interest. As long as you avoid overdraft fees from debit card purchases, the cost of your cash transaction will be the total cost paid for that purchase.
Debt Reduction
If you have amassed a large credit card balance, switching to cash may help you reduce your debt. By making the minimum payments and avoiding additional card purchases, you can reduce your card balance more quickly. Debt is a major problem for Canadians. As of December 2022, the average debt in Canada was $21,183 (excluding mortgage debt), according to a report from Equifax.
By paying for purchases with cash, you avoid interest charges on those new purchases. Additionally, if you have triggered a penalty APR on your credit card, it may be wise to pay with cash, as new charges could accrue higher interest charges.
Featured Partner Offer
1
American Express Cobalt® Card
American Express’s Secure Website
Welcome Bonus
Up to 15,000 Membership Rewards points
Annual Fee
$155.88 ($12.99 per month)
Regular APR
21.99%
Credit Score:: 700 to 900 – Good to Excellent
A credit score isn’t a static number and there are several factors that go into calculating it. The credit bureaus use their own proprietary algorithms and calculate their own credit scores. Equifax uses the Equifax Risk Score, while TransUnion uses the CreditVision Scoring Model. They are provided as guidelines to the issuer, which may take different factors into account, and approval is not guaranteed.
Bottom Line
You are not likely to be able to avoid cash entirely. And there are benefits to be considered with either cash or credit. While credit cards offer security benefits, many people prefer the discipline of cash.
Evaluate your needs and choose the option that works best for your lifestyle. It will likely be a combination of the two based on the individual purchase and your preferences.
