"How will you be paying today, cash or credit?" seems like a relatively straightforward question that speaks to your personal preference as a buyer. However, each payment method offers a mixture of benefits and liabilities. It is important that you understand the short- and long-term consequences of either answer before handing over dollar bills or swiping plastic.
Both cash and credit cards present budgeting challenges when used irresponsibly. When you all you have is $500 in cash, all you can spend is $500, which helps avoid accumulating debt. However, you may still spend more money than necessary. If you continually withdraw cash from your bank account and rarely meet your financial goals, such as saving a portion of your paycheck to put toward student loan payments or an apartment after college, you need to examine your cash leakage problem and limit your casual spending to a set monthly amount.
Credit Card Debts
Many people find credit cards an easy way to maintain a budget and account for purchases. You can use a card can be used to buy goods throughout the month, and if you pay the bill in full before every due date, you avoid accumulating debt while potentially earning perks from the credit card company, such as reward points or cash back. However, a card with a credit limit that greatly exceeds your monthly expenses may lead to overspending and the accumulation of interest charges as you repay the balance.
Payment Method Limitations
Both cash and credit cards possess limitations as a payment method for 100 percent of your purchases. Many hotels and car rental companies require a credit card at check-in. At some locations you may be able to use a debit card or a prepaid gift card branded as a Visa, MasterCard, American Express or Discover card to secure your rental and then pay with cash at check-out. However, the full amount of your rental charge and an additional security deposit will usually be put on hold until a full payment is received. Similarly, many smaller business and person-to-person transactions take place using only cash or check payments.
Using a credit card responsibly and paying your bill on time helps build your credit report and score for future major purchases, such as your first home. Paying with cash or using a debit card does not provide the same benefits. However, other financial transactions, such as buying a car or obtaining a small loan from your bank, also help build credit while letting you avoid the risks of revolving credit. If you prefer to use a charge card but worry about overcharging, consider using it only to pay a fixed monthly expense, such as your phone bill or insurance and paying the bill off every month.
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