Getting in control of your finances can be a journey, but deciding how you travel along that journey is up to you. With spending, a classic and long asked question is if it’s better to use cash, debit cards, or credit cards. Fortunately, or unfortunately, there is no one size fits all answer. Let’s explore each of the options to determine what may be best for you and in what circumstances.
Cash
Have you heard of the expression “cash is king”? There is a reason this phrase exists. Paying with cash can be extremely beneficial in that you’re paying in full instead of borrowing the funds to pay. In paying with cash, you will incur zero fees. No late fees, interest payments, minimum purchase requirements or convenience fees.
The psychology of paying with cash has you spending less overall money. You don’t really have a great concept how much you’re spending when you whip out your credit card for every purchase. It’s abstract. With cash, you literally see it leaving your wallet and makes you cut down on impulse purchases. If you only pay with cash, you never spend money you don’t have. How many times have you been somewhere that said cash only? I know that I’ve been there. Small markets, a local boutique, the county fair booth that only takes cash.
Debit Cards
Since many people don’t like to carry cash around, debit cards are the next best thing to help keep your expenses in check. It’s super convenient and they’re accepted almost everywhere, and you even have the capability to get cash back. Typically debit cards don’t have annual fees unlike some credit cards that can range from $95-$500/year. Because the money is immediately withdrawn from your account, it helps to curb overspending. It may also help you avoid large impulse purchases that you may justify if you use a credit card. Since the money is taken directly from your checking about, there is no interest charged unless you overdraw the account. These are all pretty positive, but just like any type of payment, there are some downsides too.
Fraud protection may be limited, and a hacker could clear out your account before you even know that it’s been compromised. If you notify the bank that your card was stolen within two days, you may be responsible for up to $50 on any of the fraudulent charges. After two days, it may skyrocket to $500 and then after 60 days, you may be responsible for all of it. Debit cards are an excellent choice for daily and smaller purchases, but not feasible for large expenses. As mentioned, if you overspend, you may overdraw your account which could cause you overdraft fees as well as interest. In the world today, your credit score is important in you life for qualifying for utilities, rentals, and so many other things. With a debit card, you do not build up your credit, unlike credit cards.
Credit Cards
Eight out of ten adults have at least one credit card. But just because everyone else is doing it, doesn’t mean you have to. There are reasons that credit cards are so attractive. Some can be good for you and some not so good.
One of the things that makes credit cards so attractive to people is the rewards. Cash back, mileage, gifts, etc. You should be taking advantage of these without overspending. If you’re comfortable with owning several cards, you could get even more out of the cards. For example, you could use your Discover It card solely for its five percent BONUS CATEGORIES that rotate quarterly. Let’s say you get 1% (low end) cash back on all your purchases. If you spend $500 on your card within the month, you earn $5 for spending what you would’ve spent anyway.
I am a big proponent of using credit cards, but only if you can pay them off monthly and can use them responsibly. If you’re prone to overspending and have a hard time staying on budget, a credit card can be more of a hindrance than a good idea. It might be better to stay with cash or debit card transactions.
Credit cards can be a good addition to your financial health in building your credit, but they can also be a huge pitfall if you make mistakes and don’t use them wisely. I hope that you’re not making the above mistakes in your daily financial life. And it’s never too late to stop doing them now.
Are you paying for a bill (rent, medical, college, etc.) that tacks on a fee just to use the card? In most cases, the fee is not worth it. This is especially true if the charge isn’t as much as you’d earn in rewards (ie: cash back). There may be some instances where it’s worth it. For example, if you pay your taxes through Pay1040.com, the fee is only 1.87% of your payment. If you have a card that offers 2% cash back, then it may be worth it.
Have you ever heard that carrying a balance on your credit card can help increase your credit score? MYTH!!! 22% of Americans actually believe this myth. I hope that you’re not one of them. That’s ok if you are, today is the day that you change that idea. It not only hurts your credit score, but also costs you money $$$$$. Please review the blog Credit Score and How it Effects Your Finances, June 1, 2021 to delve into more specifics about items affecting your credit score. https://realpamelaferguson.wixsite.com/website/post/credit-score-and-how-it-effects-your-finances
Your goal should be to pay off all your credit cards every single month. My entire childhood and early into adulthood, I thought it was the norm to just pay the minimum payment on all my cards. In 1988 (when I turned 18) they gave out credit cards like water. I had cards for almost every store in the mall. It took some time and understanding to begin to carry no balance and get rid of most of those cards.
The majority of credit cards are compounded daily. What does that mean? That means at the end of the statement period, if you have a balance (meaning that you didn’t pay it all off), the card company will multiply it each day by a daily interest rate and add that to what you owe. The daily rate is your annual interest rate (the APR) divided by 365.
For example, if your card has an APR of 16%, the daily rate would be 0.044% (16/365). If you had an outstanding balance of $500 on day one, you would incur $0.22 in interest that day, for a total of $500.22 on Day Two. That process continues until the end of the month. If you had a balance of $500 at the beginning of the month and added no other charges, you would end up with a balance of $506.60, including interest. Of course, it’s likely that you continued to charge during the month anyway.
Being late on a credit card payment can cause your credit score to take a big hit. If you’re more than 30 days late on a payment, you should expect a 17–38-point drop. Pretty steep, huh? If you get to the point where you’re overdue 90 days, a 27-133-point drop can be expected, according to FICO data. My hope is that you are on time for every payment. However, I am aware that sometimes that’s not possible. If you are less than 30 days late, you will not take the hit on your credit report, but you will still have a late fee and added interest. It may even result in your lender increasing your interest rate, which creates a never-ending cycle of problems.
It’s not uncommon for fraudulent activity to make its way to your credit card via random charges. It’s important to stay on top of things to protect you against fraud or even errors. I know that I’ve seen accidental duplicate charges and other random occurrences. You must be proactive about checking your account and making sure there aren’t any concerning items.
Annual Fee: The yearly fee for just keeping your card. Be especially aware of this because many cards with an annual fee may waive the first year so you might not even realize that you have one.
Purchase APR: The annual percentage rate is simply calculated by taking the annual rate and dividing it by 12 to get your monthly rate. To calculate the daily rate, divide the APR by 365. Credit cards typically compound daily once you begin carrying a balance, meaning that every day you neglect to pay off your account in full, you will be accumulating interest. **It’s not uncommon for cards to have different rates for different kinds of purchases. For example, balance transfers. Another caveat to be aware of is that if you are late on a payment, this may allow your credit card lender to increase your APR. I know that it’s long and tedious, but it will be in the fine print in the credit card information.
Late Payment Fee: You may incur a late fee up to $29 for first time instances, but it could go as high as $40 for subsequent violations made within the previous six billing cycles. Some cards may waive this fee. If you normally pay your cards on time every month and had a boo-boo, call the credit card company because they will waive it for unusual behavior. However, you’re probably out of luck if you’re commonly late on your monthly payments.
Foreign Transaction Fees: Depending on your card, they may require you to pay foreign transaction fees on all charges outside of your home country. This is typically 3%. Check with your personal cards. I know that one of mine does not have a fee, but the other does. Before traveling, make sure you are aware of this.
Each of these payment options have pros and cons and there is a role for each of them in your life. If you’re uber disciplined, you’re probably best off using credit cards and utilizing the rewards programs to your benefit and pay the balance every month. If you’re a work in progress and tend to sometimes use your card just for wants that are beyond your means, a debit card or cash is the best option for you—for now. Your goal is to get a handle on your expenses so you can work with the rewards.
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