Do you use your credit card for most purchases? Are there times you prefer paying with your debit card? Perhaps you still use those funny green paper rectangles with numbers on them?
Cash hasn't been forgotten, especially for smaller payments. A new study by CreditCards.com shows that 45% of consumers who have rewards credit cards still prefer to use cash for payments below $10. Even debit cards are more popular than credit cards on small payments, by a 30% to 23% margin.
This finding is consistent with previous data from the Federal Reserve's Diary of Consumer Payment Choice (DCPC). In 2016, the DCPC found that 55% of all payments of $9.99 or less used cash, while cash prevailed for 35% of purchases between $10 and $24.99 but only 19% of purchases from $25 to $49.99. The CreditCards.com study agrees, showing that $25 is the median tipping point for using credit for purchases.
Why wouldn't you use a credit card for all purchases when you get rewards from your credit card company? Lack of speed and convenience are the main reasons, according to the CreditCards.com study. Now that chip readers are prevalent, the simple swipe has been replaced by chip card insertions that can take fifteen seconds or longer to process.
Aversion to debt plays a role. One-quarter of consumers cited concern about excessive credit card debt – the second most common reason in the study. That concern is well founded. ValuePenguin estimates that the average credit card debt for households that carry balances is $9,333. According to the Federal Reserve, total revolving debt – most of which is credit card debt – exceeds $1.03 trillion.
Millennials show an unusual split in their cash usage. Approximately 36% of the older segment of the generation (ages 28 to 37), perhaps remembering the Great Recession, prefers to use cash for small purchases. The younger segment (ages 18 – 27) prefers credit, with 41% opting for credit and only 24% preferring cash.
While bigger purchases are usually put on credit, the psychology of smaller purchases may push people toward cash. Smaller purchases seem to have trivial credit rewards – for example, a 2% cash-back card would yield a paltry $0.02 on a $1.00 purchase – but every little bit adds up.
How should you pay for smaller purchases? There is no single right answer.
If you want to maximize use of your rewards card, you should always pay with credit – but only if you don't charge more than you can afford to pay at the end of the month. Interest charges will swamp your rewards program savings. Any late or missed payments may hurt your credit score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.
Do you have trouble controlling your spending with a credit card? Use cash or debit cards instead. Again, rewards will be outweighed – this time by purchases that you didn't need.
Did you get a sign-up bonus that requires you to spend a minimum amount within a certain timeframe to get the bonus? It makes sense for you to include your small purchases toward the total, but again, you must be careful to avoid unnecessary spending.
Don't feel comfortable carrying cash? Use your credit card for everything and enjoy the protection that credit cards provide, regardless of the amount of money involved. Federal law limits your losses to $50, but most cards offer zero-liability protection.
Find your preferred payment strategy for small purchases and stick with it. If it involves cash, that's fine. With $1.69 trillion in circulation as of September 26, 2018, there should be more than enough available to handle your latte and candy bar purchases.
If you want more credit, check out our list of credit card offers.