When Is It Better to Use Cash vs. Credit

Depending on your upbringing, you may have been taught that having a good credit score is the best thing since pants with pockets. On the other hand, you may have been warned that credit is dangerous, and that it is always better to use cash to pay for the things you can afford in the present. Oddly enough, both life lessons can ring true at any given moment.

For example, when purchasing a car–the average person does not have $20,000 of cash in hand, and so, that is when it is beneficial to use credit.  And if by chance you have managed to save up $20,000, you might want to consider that dropping that amount of cash at one time for a depreciating asset is probably not the best use of your money.  (Note: If you are able to pay cash for a car because you have enough disposable income to do so, then paying cash for your car is a smart course of action.)

Because a lot of us find credit confusing, we sometimes find that we avoid knowing our credit score.  We spend our time in the dark, either assuming the worst or the best, oblivious to which choices have actually affected our credit. While this post won’t go into detail about the importance of knowing your credit score–we strongly advise the use of credit checkers and taking the time to understand which purchases have impacted your credit history.

With that being said, once you do know your credit score–you’ll want to make wise decisions with both your cash and your credit.  So you may find yourself wondering when is it best to use cash for a purchase, and when is it best to put it on your credit card.

The Pluses of Using Cash  

When using cash (and in this case consider a debit card cash as well), you are limited by what you have on-hand.  This may sound like a negative, but it is actually a plus in that it allows you to be more mindful of your purchases.  You are actually less likely to make impulsive decisions when your purchases require upfront payment.

Cash can also be beneficial in the event of an emergency.  If your car needs repairing, your dog gets sick, or something breaks down–having cash on hand will allow you to immediately handle an emergency.  Even if you have debt, Dave Ramsey recommends at least $1000 in an emergency fund, which can be crucial to preventing your from incurring more debt as you handle life’s unexpected events.

You may also find that saving up for some purchases works to your benefit, while you may not want to save up for something as major as a car like in the example above, you may find that saving up for a new television or gadget is more sensible than charging it.

In general, one of the major pluses of using cash is that it allows you to create a realistic spending plan, and promotes smarter spending on your behalf.

When Using Credit Makes Sense

As mentioned in the beginning of the post, using credit can be beneficial for large purchases like cars, or even when taking trips.  Credit cards can also provide a higher sense of security than cash/debit cards in the event of fraudulent charges.

One of the most important things to remember about using credit cards is to make your payments on time to avoid accruing interest and higher payments.  You want to make sure that you are only charging amounts that you can cover once the bill is due. If your payments get too high, you may find this negatively impact your overall credit score as you fall behind  on payments.

Ultimately, however, credit is something to be managed wisely, not something to be feared.

When it comes to managing your cash and your credit, you want to have a plan. Spending wisely will always allow you the freedom to move between cash or credit worry free.

For more practical financial tips like this,  sign up for our monthly newsletter and get news, resources and tax tips straight to your inbox!

Written by Desnoyers CPA

Desnoyers CPA

Known for her friendly, outgoing nature and her rare talent for financial foresight, Lydia Desnoyers has been serving individuals and small businesses in Florida since 2010. After earning her Master’s Degree in Accounting from Nova Southeastern University and her Bachelor’s Degree in Accounting from Florida State University, she became a Certified Public Accountant and a Certified Fraud Examiner.

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone