When checkout clerks ask, "Paper or plastic?" they are referring to the type of bags desired, but they could be asking about your preferred method of payment. In today’s digital society, cash purchases are increasingly rare, but that does not mean it is always preferable to "Charge it."
Many studies have proven that people who use credit for their purchases spend more than those who use cash. There is a psychological effect caused by physically handing your cash to someone else that makes you reconsider going through with a purchase, whether by deciding against it completely or purchasing a less expensive item.
Should you consider a cash-only lifestyle? Probably not — credit cards have too many advantages and there are specific times in life where the use of credit cards is a significant positive. For example, when you graduate from high school and strike out on your own, you will have no credit history. That makes it difficult to make larger purchases, acquire school loans without co-signers, etc. At that stage in life, it is best to get a single credit card, make regular small purchases on it, and pay them off promptly. Something like a gas station credit card is ideal, since it eliminates the temptation for a teenage spending spree at the mall. "Start with maybe one expense," suggests Jocelyn Paonita, Founder of The Scholarship System. "Choose one thing that you want to put on [your credit card]. For example, mine was gas. I knew I needed gas, and so I chose gas to put on my credit card – and that was all I put on there. And I never spent that out of my checking account. I knew I would always be able to pay it off each month."
How do you maintain the proper balance between credit and cash? If you are a person who tends to mismanage his or her credit cards, switching to cash does not necessarily solve your problems. The key is to understand your tendencies and weaknesses. Assess your spending habits honestly. For example, are you a planner or an impulse buyer? Are you good or bad at budgeting in general? If you are an impulse buyer and/or a poor budgeter, steering more purchases toward cash may help. However, if you are draining your bank account through regular visits to an ATM, it is time to draw up a budget and stick to it.
The most efficient way to use credit cards is to pay off the balance in full each month. (In addition, this is healthy for your credit score.) You won’t have to concern yourself with comparing interest rates and penalties if you never charge more than you can pay each month. Under this scenario, using credit is to your advantage in several ways:
- Almost all credit cards offer some sort of incentive such as cash-back, merchandise redemptions, or airline miles. These are essentially free resources if you avoid interest charges from carrying a balance.
- It is easier to make large purchases, and most online purchases, with credit. Warranties and protection plans are often available, if not already included.
- Building a good credit history will help for future major purchases that require securing loans (such as a car or home).
- Your purchasing history is easier for you to track and analyze. Most credit card issuers will have your records readily available online for review.
- If your credit card is stolen and misused, you are limited to $50 liability by Federal law. Stolen cash is unlikely to be recovered.
- You are in effect giving yourself a short-term, interest-free loan (assuming you pay the balance off monthly).
For most people, it is best to choose a single credit card and consolidate all the purchases to maximize benefits. Don’t be persuaded into carrying multiple credit cards because each one offers a different rebate scheme, or specific airline miles. The odds are that you can’t make enough credit purchases to receive all the benefits, and you are much more likely to lose track of purchases or overspend.
What if you have trouble budgeting or controlling your spending? Try these tips:
- Partition your spending, using cash for your trouble spots. Perhaps use credit at the gas station and cash at the mall. You probably won’t buy an extra 20 gallons of gas on impulse!
- Use an allotment approach. Set your own monthly limit on your credit.
- Consider using a debit card instead of a credit card — but make sure you check into potential overdraft penalties. Note these do not offer the same protection as credit cards in many instances.
Make sure when you buy something, whether through signing on the dotted line or handing over large bills, that you have the means to pay for it. If you put $100 on a credit card for an item because you won’t have the cash until your next paycheck, it might end up costing you $200 or more if you end up paying interest on the balance. As National Financial Educators Founder and Chief Education Officer Adam Carroll points out, "One of the greatest expenses we have in our life is the interest expense on debt." Before a purchase, consider if what you are buying is worth the ultimate cost.
If you want more credit, check out MoneyTips' list of credit card offers.