Cash and Credit Cards have been at war with each other for some time now; each fighting for dominance over the other. Plastic has clearly gained ground over cash, but cash is no dying breed.
Both are crucial elements of the economy and if you want to stick to your budget then you must understand where to use which one. Using only cash or relying only on your Credit Card is not a good financial habit.
In this article, we will discuss the benefits and limitations of each mode of payment. We’ll also talk about which payment method is best suited for different kinds of purchases.
Additional Reading: Tips to effectively utilise your Credit Card!
Credit Card: Pros
Credit Cards are convenient: If you think about it, Credit Cards are God sent. If you’ve never been a fan of carrying cash then Credit Cards are just the thing you want in your wallet. It’s easy to carry and instantly boosts your purchasing power. The best part about Credit Cards is that they allow you to purchase big-ticket items in one swipe for which you can repay in affordable EMIs.
Credit Cards truly came to the rescue of mankind during demonetization and more so after the Government placed caps on cash transactions (withdrawal and deposits alike) and ATM transactions. With cash transactions now limited to Rs. 2 lakhs, Credit Cards have become man’s best friend. Moreover, Credit Cards perfectly align with the cashless economy vision of the current Government.
Helps build your Credit Score: Food, clothing, and shelter have long been considered the three basic needs of life. Today, in addition to these three, you also need a good internet connection and an excellent Credit Score.
You can perhaps get away with a low GPA or CAT score, but there is no getting around a poor Credit Score. A Credit Card helps you build this Credit Score. With a good Credit Score, you can get loans and financial aid from lenders without a fuss and at lucrative interest rates too.
You just need to be mindful of paying your Credit Card bill on time and not maxing out the limit each month. Remember, a Credit Card is your tool to build a 750 plus Credit Score.
Rewards for spending: Credit Cards are grateful things. When you shop with a Credit Card you earn rewards, points, and cash back. You can either use your rewards and points to purchase something new or to pay your Credit Card bill, depending on the deal offered by your bank. Cashback, on the other hand, is great because you get a certain percentage of the amount spent back in your account.
Strong consumer protection policies: We all want to feel protected, don’t we? If you lose cash it’s highly unlikely that you’ll ever get it back. If you lose a card you can immediately block it and request for a new one. No money lost.
Your card is protected by a PIN and password. Even if somebody manages to get past your card’s security settings, your liability is limited to a certain amount. Some cards feature zero liability in case of theft or loss. This is a feature you must look out for when you apply for a Credit Card.
Credit Card: Cons
Overspending: Unlike with cash, you do not feel the pinch when shopping with a Credit Card until the bill lands in your inbox. Therefore, if you are not careful, you can easily overshoot your budget in a snap.
What happens then? Interest is charged on your outstanding balance if you are unable to pay your Credit Card bill in full. This extra interest can pinch very hard. It is wiser to keep checking your Credit Card statements so you know when to pull the brakes.
Additional Reading: Tips To Use Your Credit Card Wisely
Cash: Pros
Budgeted Spending: Cash, due to its limited nature, keeps you within your budget. You can only spend what you have. Moreover, when you spend cash you are aware of the total amount you are spending. This allows you to be mindful of what you are purchasing.
Making purchases with cash feels more personal than with a Credit Card, hence, you are more likely to look for better deals and avoid impulsive purchases.
No Charges: Some Credit Cards come with charges and fees. Apart from the interest that you pay (if you don’t pay your Credit Card bill in full), there are also charges like late payment fees (if you don’t pay your bill on time) and many cards even have an annual fee. Cash comes with zero charges and no interest rate.
Readily Accepted: Credit Cards are ubiquitous and readily accepted. But, you cannot use them for small purchases with hawkers or at your local street vendor for example. Only money will work there. Hence, you cannot completely get rid of money, for the time being at least.
Cash: Cons
Bulky: Cash is bulky. Even if you carry high denomination notes, how much can you possibly carry at a time? It’s inconvenient, especially if you are looking to make a heavy duty purchase. Traditionally, people carried cheques, but now we have something more convenient called a Credit Card.
Not very safe: All your cash is gone if you lose your bag or wallet. The chances of recovering your money are quite slim most of the time.
However, if you lose your Credit Card, you only lose the card and not the cash. Banks will immediately block your card at your request. Moreover, you have consumer protection policies that reduce your liability in case of a mishap.
With the pros and cons of both the methods laid bare, it’s time to look at when to use cash and when to use a Credit Card.
Cash Territory
Do you have Credit Card debt? Perhaps you should switch to cash. You are in Credit Card debt in the first place because you didn’t use your card wisely. If you continue using your card, you are just adding to your outstanding debt.
Outstanding amounts on Credit Cards attract a lot of interest, so no matter how carefully you use your card now, you are only adding to your debt pile. Switch to cash till you clear your debt. That way you’ll be mindful of your spending and will be aware of what you want.
There are some purchases you make wearing your pyjamas, like buying milk or vegetables and other items of daily use. These items cost little and are perfect for cash purchases. Using your Credit Card for these purchases is foolish. These tiny amounts can add up to a lot by the end of the month and set you back a great deal. Hence, stick with cash for all your everyday needs.
Are you a spendthrift and find it impossible to curb your spending habits? Again, Credits Cards are not for you. Stick to cash. You will probably spend your entire salary within a week of getting it in your account, but at least you won’t rack up any debt. The day you master the art of spending within your means, you can apply for a Credit Card.
Credit Card Territory
You are in need of a big ticket item and don’t have the money to purchase it. Well, a Credit Card is the answer. Just make one swipe and the product is yours. Worried about how to repay it? Break up your purchase into small, affordable EMIs. You can even pick your own tenure.
Clearly, cash doesn’t offer such convenience. It requires saving, and the moment you part with it your liquidity dips. Credit Cards allow you to meet your needs without hurting your liquidity.
Credit Cards are perfect for online purchases. They offer security and you can even bag offers that are exclusive to Credit Cards. E-retailers often partner with popular banks to offer discounts and deals on their Credit Cards. Moreover, you can break up your online shopping into EMIs if the burden is too much to bear for a month. Advantages galore.
Additional Reading: Going Cashless? Here’s What You Should Know
If you are new to personal finance, then your biggest worry is to build a Credit Score. It’s like a fresher hunting for a job and being turned away because he/she doesn’t have experience. A Credit Card is the best way to build your Credit Score. Use it wisely and pay your bills. Your score will look good in no time.
But, how are you supposed to get a Credit Card without a Credit Score? Begin with a secured Credit Card. This card comes with a small upper limit and is given against the security of a Fixed Deposit. This is an excellent way to prove your merit to the banks. You can upgrade to a regular Credit Card once you build a strong score.
Additional Reading: Credit Card Handbook: All Questions Answered
Cash is good but so is a Credit Card. It helps you to keep up with the rising cost of everything with its EMI feature and gives you leeway when you have to spend a little extra.
Although these features are meant for convenience, you shouldn’t exploit them to pander to your royal needs. Just be wise and you will know the benefits of owning a Credit Card.