Cash or Credit?

by Krantcents · 45 comments

Post image for Cash or Credit?

Cash or Credit? It is one of the most fundamental questions, you are asked when making a purchase at a store.  You could pay with cash or use your debit card; most businesses treat either as cash.  Using your credit card may give you a cash rebate, frequent flier miles or points to be used for flights or merchandise.  It is your choice or is it?

What is your choice?

Using your credit card for a ten dollar purchase is certainly a choice!  Using your credit card for a major purchase such as furniture, major appliances or vacation is an important decision.  When faced with a major purchase, what do you do?  Do you examine the alternatives?   Do you just write a check using your emergency or sinking fund?  In other words do you just use the funds you put aside for those planned replacements that you know will be made over time?  Sure you do!  Too many people say charge it because they are unprepared and cannot pay for it in cash.  Is that you?

Okay, you had to replace your washer and dryer!  It was bad timing, it was during the holidays, you were expecting company, your children were returning from college, or you just spent all your Christmas money on presents.  So you put it on your credit card and you will pay it off over the next couple of years.  Your credit card charges 24% per year on the unpaid balance.  You were lucky and bought the washer and dryer on sale.  It still totaled $1,000!  If you make minimum payments of $30 per month, you will pay this purchase off in roughly ten (10) years.  You paid over $1,300 in interest for that washer and dryer!

Good or Bad choice?

Was this a good choice?  You tell me!  You will pay over $2,300 for two (2) major appliances.  In the next ten (10) years, it is very likely that you will replace the washer and it won’t even be paid.  Did you receive the kind of quality you would expect for such a expensive purchase?  If you were not making payments, what could do with the money?  If you add up all your payments, it is probably a pretty big number.  If you invested that money, how much would you have?  Many would respond that they had no choice!

I disagree!  You maintain your car, because you need it.  You eat because the alternative is obvious.  You know you must replace equipment, furniture or clothes over time.  You can get your finances in good shape so you are not paying the price of a Mercedes for a Volkswagen.  Set up a sinking fund for these replacements so you have a real choice.  If you don’t, you will pay more in interest which makes everything more expensive.  Start a savings account for those unplanned and unexpected expenses that will always occur.  Recently, I wrote an article called “5 Important Financial Skills” points out five healthy financial habits.

Wrap up!

The next time you are asked cash or credit, what are you going to say?  Remember to only put things on your credit card that you can pay off each month.  Plan your major purchases, clothing or furniture purchases and save the money before you need it. Not having the money means you do not have a choice.  Using credit also means that the payments are going for principle and interest that would be better spent elsewhere.  A decision means you have a choice.  Having savings for those extraordinary purchases gives you a choice.  What are you going to do?  Cash or Credit?

Photo by: futurehape

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retirebyforty March 21, 2011 at 5:57 pm

I pay cash for most everyday items and only put a few things on the CC. Anything over internet, gas, and big purchases go on the CC. We have always been able to pay it off every month so far like you suggested. We have our emergency fund to help cover anything big like a washer/dryer.

krantcents March 21, 2011 at 10:53 pm

Great! A choice is only a choice when you have the cash savings.

Twintalk2 March 21, 2011 at 10:22 am

This is why having an emergency fund is so important. You can replace the washer or dryer or both and immediately go back to saving for and emergency again. trying hard to get out of debt and learning slowly!

Afford Anything March 21, 2011 at 6:43 pm

I’ve been both fortunate enough and disciplined enough to never have carried a credit-card balance in my life. The idea of paying such enormous interest rates scares me! I treat my credit card as though it’s a debit card; I can only use it to buy what I can afford in cash. And because I’m paying by CC, I get 1% cash back at the end of the year.

krantcents March 21, 2011 at 11:01 pm

I find it interesting that you use the word fortunate. I think it takes discipline and a deliberate strategy to avoid credit card debt. Congratulations.

krantcents March 21, 2011 at 10:57 pm

You are right! It is either that or having sufficient cash flow to cover it.

Buck Inspire March 21, 2011 at 9:58 pm

Great point about having choices. I pay off my monthly credit card bills so never really thought of the negative, long term effects. It’s unreal a washer and dryer could hit you in the wallet like that if you draw out the payments. Actually anything will do pretty good financial damage if you just go for minimum payments. Nice lesson for all.

Kris @ Everyday Tips March 22, 2011 at 3:44 am

I always use credit, but that is just because I love my rewards, and I pay the bill off every month.

If I was in the situation you mentioned, I would probably try to buy the washer and dryer from someone that deferred interest for a year and then save over those 12 months. However, having money saved for such emergencies is much better!

Eric March 22, 2011 at 3:07 pm

I always use my credit card. It offers 2% cash back and certain protections and warranty extensions. It also protects theft better than a debit card. However, I pay it off in full every single month, so I don’t pay interest.

krantcents March 22, 2011 at 3:32 pm

Your personal cash flow and your discipline allow you to make that choice. I am not advocating cash, but using a credit card and maintaining a balance is not a choice.

krantcents March 22, 2011 at 3:26 pm

Absolutely! This was an extreme to make the point, although many people only make the minimum payment and fall into this plight.

krantcents March 22, 2011 at 3:27 pm

Better choice, however the deferral has a cost too.

Kris @ Everyday Tips March 23, 2011 at 4:21 pm

Very true, but in absence of any other choice, I would pick deferral instead of putting the debt on a high interest card, (Assuming the purchase was a washer/dryer or some other necessity.)

krantcents March 23, 2011 at 6:34 pm

That is why I have a line of credit!

Barbara Friedberg March 22, 2011 at 11:27 pm

I’ve heard that folks tend to spend more with credit cards. I don’t know if its true or not because I charge most items and pay off my cc in full EVERY MONTH. That way Quicken can track and categorize all of my spending and I get the benefits from my card.

krantcents March 23, 2011 at 12:11 am

I think some people certainly overspend because they are unaware of how much they are spending. Let’s not just blame credit cards for this, sales, discounts, and rewards contribute to overspending. In addition, spending money buying things or services is pleasurable! The hard part comes later when we have to pay for it.

LifeAndMyFinances March 23, 2011 at 10:44 am

I think the question will soon be, Credit or Cell Phone? I can’t wait for the day when I can use my cell phone to purchase my groceries.

With using a credit card though, if I was planning for the big expense, I wouldn’t mind using the card to earn the points. I know that the money is there (plus my emergency fund). I do always feel more at ease when I pay with cash though. That’s just me.

krantcents March 23, 2011 at 2:32 pm

Cell phone payments will be interesting! I think they do this in Japan already. I like using my credit card, as long as it does not go higher than I can pay for it at the end of the month.

RegularFolksFinance March 24, 2011 at 4:39 am

I act as my own credit card. I have a couple of thousand dollars in a slush fund that I use to make larger payments. When I need to buy a new washer and dryer, I pay for it out of the slush fund and set up an automatic payment and pay 5% interest to myself for however long I want to take to pay it off. No way I’m spending my hard earned money on interest if I don’t have to.

krantcents March 24, 2011 at 2:27 pm

That is an excellent idea! You have given a value to your money which is a very good concept.

First Gen American March 25, 2011 at 1:10 pm

I like the line “Buy a VW but pay a Mercedes price”. Sinking funds are the way to go…the only issue is that it took me years, even with a good income to get to the point where I could pay for big stuff like cars with cash. I’m glad I’m there, but it’s easy to forget those lean years when you still had a lot of student loan debt an empty apartment that needed furnishing and an entry level salary.

krantcents March 25, 2011 at 11:59 pm

Think about where you spend your money! I try to put my money to work and only take on debt that makes me money. That is one of the reasons my cars are old (16 & 14 yrs. old)..

Kay Lynn @ Bucksome Boomer March 26, 2011 at 2:56 am

I would say credit, but pay the bill in full when it came. I want the protection of the credit card when making a major purchase.

krantcents March 26, 2011 at 3:40 pm

I use my credit card for all my purchases. I do this to earn frequent flier miles, ease of returns and consumer protection. Cash or credit is only a choice, if you can pay for it.

Len Penzo March 26, 2011 at 4:58 pm

I’m with Kay Lynn. I use a credit card to pay for everything and then pay it off at the end of the month. That gives me an instant 2 percent discount on everything I buy since I have a cash rewards card.

All the best,

Len Penzo dot Com

krantcents March 26, 2011 at 5:48 pm

Discounts (rebates), frequent flier miles or some other rewards, credit cards have done a god job giving us a reason to use the cards. Paying it in full at the end of the month means you made a choice.

Doable Finance March 26, 2011 at 5:12 pm

Using credit card is always good if you can pay the bill in full within the due date. Americans in general have the bad habit of spending money that belongs to someone else. Needs is one thing but most folks buy and keep buying for no apparent reason.

I know someone who bought clothes 3 or 4 years ago because they were on sale. They were still wrapped in their original packages. That’s a waste.

krantcents March 27, 2011 at 3:54 pm

Credit cards have done an excellent marketing job to encourage people to spend money they do not have. Using credit cards responsibly requires discipline!

sara March 28, 2011 at 7:52 pm

We’ve been on an all cash/envelope budget system for almost two years now, and it’s awesome! We’ve paid off a lot of debt, and our finances are on track. We no longer have debit or credit cards, and we’ll never go back to plastic :)

krantcents March 28, 2011 at 8:27 pm

I am glad this is working for you, but credit cards are does affect your FICO score. No cards will negatively affect your score. Do you own a home yet? This lack of credit will come up when you apply for a mortgage.

sara March 28, 2011 at 8:34 pm

We already have a house. When my husband bought it 8 years ago he had not credit cards and no other lines of credit. He had no problems getting a mortgage, or refinancing a couple years ago for a better rate/15 yr (again with no cards). We pay cash for everything (including our last van). So our credit scores mean a big fat nothing to us :) We follow Dave Ramsey’s budget system and we agree with his views on credit cards and credit scores.

krantcents March 28, 2011 at 9:16 pm

I am glad it is working for you.

Money Reasons March 31, 2011 at 2:56 am

I always use a rewards credit card. I always pay off my balance each month (and always have). I have this thing were I hate to pay someone else interest!

I can afford it if 2 or 3 house appliances went out. The only thing that would make me sad would be if I needed a new car…, but I wouldn’t buy a new car, after the car I have now, I’m only buying used.

I do save up for things though! I’m still saving money from my reward credit cards to by a decent HDTV.

krantcents March 31, 2011 at 3:13 pm

I have used a rewards credit card for over twenty years and always paid them off each month. It has enabled us to travel to Europe numerous times. Well worth it! I have not had a car payment for nearly ten or eleven years, and my cars are 16 and 14 years old. I may just keep these cars forever.

Spruce Up Your Finances April 1, 2011 at 2:39 am

I use the credit to obtain rewards and mileage as well. The key is paying it early or the following month. Otherwise, the interest charges will creep up and may cost more than the rewards.

krantcents April 1, 2011 at 2:51 am

You are absolutely right! I keep a safety net that costs me nothing unless I need to use it. It is a line of credit with an interest rate at less than 5%. This is significantly less than 18-24% most cards charge.

ann @ merchant services April 28, 2011 at 1:55 am

It is so hard to have a credit card at hand especially if you will go shopping. If you desire to buy something that is too expensive and you do not have enough cash, you are really tempted to use your credit card. It is okay to say, ” I can pay it later”, but the question is, would you like to stay forever in debt? Be practical! Most of the goods and services are getting more and more expensive nowadays so better think of the needs that you must buy and not your wants only.

krantcents April 28, 2011 at 2:25 am

I think it is a matter of needs and wants! A credit card should not be used as a loan, because it is terribly expensive (24%). Understanding what you can afford is real important before you go shopping.

ann @ merchant services May 2, 2011 at 5:03 am

I agree! Hopefully, people will understand that. Even though with their cable or other services, they should not go beyond their means. Thank you.

krantcents May 2, 2011 at 10:49 pm

Thanks for stopping by, I hope you find other articles equally beneficial.

ann @ merchant services May 4, 2011 at 11:46 am

Thank you. I’m sure that you have lots of informative articles that I can read everyday. Keep it coming.

krantcents May 4, 2011 at 11:07 pm

Thanks, I hope you read other articles you find interesting and useful.

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