There is always that silent battle between cash vs credit. If you really want to practice smart spending, you have to know the strengths and weaknesses of both. They are two of the most important and prominent purchasing tools in society and understanding both of them will help you make better financial decisions in the future.
There is much to be said about people who choose to spend only in cash. Fico.com published a study that revealed how Millennials are opting out of credit cards more and more. The article dubbed them as “they young and the cardless” because they prioritized taking on student loans rather than being saddled with credit card debt.
While we applaud the effort, you may want to take a closer look at what an all cash purchase can do to your finances life. No debt is really great but you have to know that there are implications that can affect you. Smart spending is not just about knowing what you should or should not buy. It is also about knowing how to make that purchase.
Buying things with cash only
So let’s start by analyzing what happens if you buy things in cash only. There are a couple of benefits to this spending practice.
You are kept from debt. Obviously, paying in cash means you are spending only what you can afford. You stop spending when your cash runs out.
You tend to think more about every expense that you make. Study shows that there is an emotional attachment to buying things in cash. The actual parting of money from the buyer to the seller has more effect on the consumer. This makes them more hesitant to make purchases when it is done in cash.
You can stick to your budget. Paying for things in cash will help you stick to your budget. If you run out of money, you just stop making purchases.
These are the main benefits of using cash. Now let us discuss the disadvantages.
You will not have a credit history. While your credit report will take note of other credit accounts like loans, etc, credit cards make it easier to establish a credit history for beginners. You can use it anytime without having to apply over and over again. A cash only policy can keep you from a good credit score because you will have no entry on your credit report to begin with.
Your cash, once taken from you, is as good as gone. The benefit of a cashless transaction is you can protect it from theft. If you lose your credit card, you can simply call your creditor to freeze the account.
Paying only through credit cards
Let us now shift to credit cards. There are many advantages and disadvantages to using these plastic cards for purchases. It is not fair to say that using them is not practicing smart spending. Here are the benefits of using credit cards.
You get to build up your credit history easily. One of the reasons why financial experts tell consumers to get a credit card is for their credit score. A graduate will find it hard to input data in their credit history because they will not be qualified for a loan. Simply put, you need a credit history to get a loan but then again, you also need credit to have a credit history. The easiest way to solve this is through credit cards.
You benefit from rewards. Most credit cards are offered with rewards that consumers can enjoy whenever they use these cards for purchases.
You can qualify for certain transactions. There are some transactions that require a credit card – usually for security purposes. For instance, you need a card to rent a car.
You get instant purchasing power in times of emergencies. In case something happens, you can rely on your credit card to make immediate payments.
These are the benefits that you will get from using credit cards. Now let us discuss the disadvantages.
You are in danger of being in credit card debt. This is the third highest debt in the country and you have to be wary of the interest rate and other finance charges that can bury you. If you want to reduce credit card debt, you have to practice smart spending whenever you use this.
You are taught bad financial habits. There are a lot of bad financial habits that you can get by using this. These include buying things that you cannot afford, relying on other people’s money to live a lifestyle that is beyond your capabilities and spending money that you have yet to earn.
What is the wiser spending choice?
So here is a question for you: how should you pay for your purchases? Should you pay in cash or in credit?
If you really want to be wise with your money, you have to use both. There are cases wherein cash is better while there are instances when you can benefit more by using credit cards. Smart spending is not really about not using credit – but more of knowing when you can benefit from it and taking advantage of that.
In the end, people should understand that being afraid of credit is not really the answer to our debt problems. It is the proper use of credit cards that will ultimately free us from our debt situation. You don’t have to be afraid of using your cards. You just have to know how to use it so it will not lead you in debt. Among the smart spending habits that you need to develop includes budgeting your credit card purchases, paying the balance within the grace period and knowing your rights as a consumer.
That is how you can really be smart with your money.