Is it better to use cash when cards offer discounts
I am new to budgeting and managing my own finances and have a simple question.
Is it better to use cash when credit or debit cards offers discounts. The city I live in, some shops and services offer discounts when using a credit card or debit card of a certain bank.
The problem I have with that is that I don’t like having debt. I hate seeing that a portion of my income is already set to go to someone else at the start of the month before I can even use it. Not having any debt helps me sleep better at night.
At the moment, I have some credit card debt that I need to pay in installments and a mortgage.
I discussed paying off all of the credit card debt lump sump to the bank to get rid of it, but I was advised to not do it. Note that it is 0% as long as I pay my payments on time. And will end in a few months. If I pay early, I will have to pay an early payment penalty, which is affordable for me.
I don’t know if it matters, but I am saving for something and I believe that paying by cash will help me control my finances.
Edit: So this blew up! This was my first question on this Q/A!. Thanks to all of you so much, helped me a lot in getting a better understanding of cash vs credit card debate. I am choosing the most voted answer as the correct answer, even though other answers also provide valuable advise.
You have made several statements that make me think you will be MUCH better off sticking to an all-cash (or mostly-cash) plan rather than trying to play the credit card game:
Then don’t get into debt. Credit card debt IS debt. It may be short-term debt, you may not pay any interest on it, but it is, by definition, debt. You received a benefit with a promise to pay for it later.
Great! then continue using cash and continue sleeping well at night.
Then why would you stop doing that?
Companies pay a fee when customers use a credit card, which means that they are getting a kick-back from the banks by pushing their cards. They are still making a profit on the sale, and the bank is counting on profiting from the customers that do NOT pay back the card on time, earning interest and fees for the bank.
I get the sense that you’re being pressured by friends and clever marketing to use cards to buy everything you see. Are your friends wealthy? If so, did any of them earn their wealth purely by the use of credit cards? No, they are either broke or they work very hard to earn a living and choose to play the credit game.
I fully appreciate the benefits of using credit cards. Points, miles, discounts, etc. But if you don’t have the financial discipline to use them wisely and without making any mistakes, then those benefits will be gone many times over in interest, overspending, and other fees.
Not using credit cards is not unwise. There is a very different psychological experience when using credit cards than using cash, which not only have I experienced personally, but others have as well.
I’ll keep it short:
If paying cash affects your purchasing decisions such that you tend to spend less, then pay cash.
If you’re going to buy the item either way and the price is not higher than the amount of cash you have on hand, pay it with the card to save some money, deposit that cash at the bank or ATM and pay your bill right away.
Do you pay your credit card debt in full every month?
Do you pay interest on credit card purchases even when you pay it back in the same month?
If the answer to 1 is no OR the answer to 2 is yes, then you should use cash. [*]. The interest on the credit card will in all likelihood cost more than the discount offered by the merchant.
If 1 is yes and 2 is no, then use the credit card.
My credit card allows me to transfer money to it at any time (any amount). This I do every month when I get paid. Thus my credit card has a plus balance (unless I’ve gone on a spree 😉 ), and I don’t pay any interest charges.
I’d also point out that it’s easier to lose track of your spending when using plastic rather than cash.
I believe the reason some merchants are offering a discount for CC payment is to encourage people to make a spontaneous purchase, spending more than they can really afford.
[*] Assuming withdrawing cash from the ATM is free or less than the CC interest.
You do have a loan for your extra item that you bought and you pay it off. That’s a debt. And beside that, the credit card is just ordinary expense for things that you buy anyway. That’s not a debt.
Personally I send money to the credit card right after a big expense, say a car repair, any time point in the month, and do not wait for the end-of-month automatic charge.
You would at end-of-month pay a part of your big expense, and all of the ordinary-monthly-expenses. You would not add the amounts and think of the aggregate.
That also means that you accept card discounts when you would buy the items anyway. You should not buy them just because of the card discount.
You must define what you mean better in order to answer this question.
To me, buying with credit cards is virtually always better because my credit cards maximize my wealth (they offer cash-back, they provide security, they delay my payment, and I never pay interest on them). For you it may or may not be better in this sense depending on the discount amount and how much interest you will pay on the additional amount on your credit card.
Better can mean other things as well. If you are a person who is trying to learn to control your spending, then better may mean it’s easier to have discipline when using cash. This is certainly true.
You may also have other reasons to think cash is better, like you have a personal aversion to having debt, even if you pay no interest on it. Nothing wrong with that, but it’s not a universal value–I don’t feel that way.
First you need to decide for yourself what better means for you, then you can evaluate which option satisfies it.
=========== Additional Info Based On Your Comments ================
Credit cards can be very beneficial if you have fiscal discipline, and they can punish you terribly if you do not.
Advantages of Credit Cards
Credit cards can be a cruel scourge if you are a person who does not manage your money very well. If you don’t pay off your card at the end of the month, you will start paying a lot of interest and you lose your grace period (so that new purchases immediately start incurring interest).
Notice that I am also incredibly averse to debt that charges interest, but if I have a debt that charges no interest and I’m not afraid of my ability to pay it off, I’m all in.
My Advice for You
Pay for everything you can with your credit card (get one with good rewards if you can). Create an account on mint.com and download the app. Check your total credit card balance every time you go to the bathroom. Don’t let it get too close to the amount of money you get from your paycheck minus your fixed costs (like rent). Pay all credit cards off at the end of each month. If you have more than a few hundred dollars remaining after paying them off, move the excess into a high-yield long-term savings account that you use for emergencies. If that gets a high balance, then look moving some of it elsewhere, like paying off your mortgage early.
Never use credit cards for long-term borrowing. And of course, don’t habitually spend more than you earn.
TL;DR: since you’re carrying a balance on your credit card, you should pay in cash.
There are 3 major things to consider here:
How much do you save?
This is, of course, straightforward—the discount they give you times the price. 5, 10, maybe 25%.
How much will it cost you?
For those not carrying a balance, this is somewhere between zero and -5% — yes, with cash back, it can actually cost less with a card than with cash for the same purchase price.
Unfortunately, it sounds like you’re carrying a balance. In that case, the exact answer is going to depend a great deal on your specific balance, payment terms, and interest rate. If you pay extra immediately or on the next statement specifically for the purchase in question, it may only cost you a couple percent, less than the discount; if you don’t pay extra to offset it, it’s likely to cost you a lot more than that.
That said, I would strongly advise you not to put anything else on your credit card until it’s 100% paid off and stops charging interest. I don’t want to get sidetracked into a full lecture here (there are plenty elsewhere on this site if you need guidance or a kick in the rear), but carrying a balance is expensive and shows a lack of control, and you should work hard and change your buying habits to get it paid down ASAP.
Would it change your decision to purchase
They say you’re more likely to purchase something using a card than cash. I’d expect that to be an even stronger effect in your situation. You really need to think twice and be sure you’d definitely buy it either way.