A study conducted by the Federal Reserve Bank of San Francisco found that 19 percent of all payments made for transactions in the United States were cash, marking a 7 percent decrease from 2019. This decline is partly due to the disadvantages of using cash compared to other payment methods.
However, there are still significant advantages to using cash that shouldn’t be overlooked. Understanding the benefits and drawbacks of cash payments can help you make informed decisions for your financial needs the next time you’re in the checkout line.
Advantages of Using Cash:
1. Easy to Use:
Cash transactions are quick and straightforward. There’s no need to present a card and wait for it to be processed. Additionally, you don’t have to worry about payment errors or system outages that could decline a card transaction. Cash ensures you can always buy what you need, even if electronic systems fail.
2. No Hidden Fees:
When you pay with cash, the amount you spend is exactly what the merchant charges. Credit and debit cards often come with hidden fees. Some financial institutions limit the number of debit card transactions and charge fees if you exceed that limit. Overdraft fees and credit card interest can also add up, making purchases more expensive over time.
3. Helps Reduce/Avoid Debt and Interest:
Using cash helps you avoid increasing your outstanding balances on credit cards, which is crucial for reducing debt and improving your credit score. Paying with cash means you are spending money you already have, keeping your credit card balance low and avoiding additional interest charges.
4. Universally Accepted:
While large retailers and chain restaurants typically accept credit cards, smaller businesses, such as local markets and food trucks, may only accept cash. Having cash on hand ensures you can make purchases at any location.
5. Reduces Impulse Purchases:
Carrying cash can help curb impulse spending. The effort required to withdraw cash from an ATM or bank makes you more likely to consider whether a purchase is truly necessary, reducing the risk of buyer’s remorse.
6. Easier to Budget:
Using cash can help you stick to a budget. By withdrawing a set amount for a specific period (daily, weekly, or monthly), you can easily track your spending and ensure you don’t exceed your budget.
7. Teaches the Value of a Dollar:
Spending cash can make you more conscious of the value of money. Watching the cash in your wallet diminish as you make purchases can reinforce the reality of spending, something that can be less tangible with electronic transactions.
8. Provides Privacy:
Paying with cash protects your personal information. Credit and debit card transactions often require sharing personal data, which can be vulnerable to theft. Cash transactions don’t leave a digital trail, safeguarding your privacy.
9. No Credit Balances:
When you pay with cash, the transaction is complete immediately. There are no credit card balances to manage, helping you avoid additional debt and maintain financial control.
Disadvantages of Using Cash:
1. Doesn’t Build Credit:
To finance significant purchases like a car or home, a strong credit history is essential. Paying with cash doesn’t contribute to building credit. Using a credit card responsibly can help demonstrate your ability to manage debt, which is necessary for improving your credit score.
2. Physically Inconvenient:
Carrying cash can be less convenient than carrying a card. Cash requires a wallet, money clip, or purse for storage, which can be cumbersome. Additionally, cash is made of porous paper that can harbor germs, posing hygiene concerns.
3. ATM Fees and No Interest:
Accessing cash can incur costs. Using out-of-network ATMs may result in fees from both your bank and the ATM owner. People who avoid banks and rely solely on cash miss out on interest that could be earned in checking or savings accounts, potentially losing money over time.
4. No Account Perks and Rewards:
Using cash means missing out on rewards and perks offered by credit cards, such as cashback, travel points, and consumer protection. These benefits can save you money and provide additional security for your purchases.
5. Limited to In-Person Transactions:
Cash cannot be used for online shopping, phone orders, or other electronic transactions. This limitation can be inconvenient in a digital economy where many purchases are made online.
6. No Automatic Record Keeping:
Credit card statements provide a detailed record of your spending, which can be helpful for budgeting and tracking expenses. Using cash requires you to save receipts manually, making it harder to keep an accurate record of your purchases.
7. Not a Reliable Failsafe:
In emergencies, having a credit card can be crucial. If you lose your wallet or encounter an unexpected expense, not having a credit card can leave you without immediate financial resources or force you to consider costly alternatives like payday loans.
8. Prone to Loss or Theft:
Cash can be easily lost or stolen. Unlike cards, which can be canceled if lost, cash is irreplaceable. Carrying large amounts of cash can also make you a target for theft.
9. Can Encourage Overspending:
Without careful management, having cash on hand can lead to overspending. The immediate availability of cash may tempt you to make unnecessary purchases, which can derail your budget.
Should You Use Cash?
The decision to use cash depends on your financial goals and circumstances. If building credit is a priority, using credit cards responsibly may be more beneficial. Conversely, if you’re focused on reducing debt and controlling spending, cash payments can be advantageous.
You don’t have to choose exclusively between cash and cards. A mixed payment strategy allows you to leverage the benefits of both methods. Consider each transaction individually and choose the payment method that aligns with your financial goals and the specific situation. This approach ensures that you can enjoy the advantages of both cash and credit while minimizing the drawbacks.
If you use a credit card and think your credit report has false information on there, then you can use our help and make sure any false accounts are not impacting your long-term financial wellbeing.