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Paying Cash or by Credit Cards: Benefits and Drawbacks

Aug 17, 2012

One should pay careful attention while evaluating the option to pay either by cash or credit card. Both the options have their own merits and demerits.

Benefits of paying by cash


Various studies have shown that one would be careful to spend lesser amount when he opts to pay cash. The mere sight of his cash moving away from his wallet make one to think twice before parting with his cash for some impulsive purchases.

However this approach may not be applicable when you use your credit card for making payment towards essentials such as gas or cell phone as you have to necessarily incur such expenses every month.

If one has surplus cash, it would be better to pay off the credit card obligations before the due date. Since card companies charge 15% interest, the card holder can’t find a suitable investment avenue that would generate such high return consistently.

Some people get lured by rewards points offered by credit card companies. However if he skips payment towards his credit card obligations even once, his overdue interest might completely wipe out the entire accrued reward point benefits.

Drawback of paying by cash


When you use cash for payment, there are chances of your losing cash during transit. Ideally for large value purchases, one can advantageously use credit cards as they offer better security against theft.

Benefits of paying by credit cards


If one is certain to pay off the monthly dues towards credit card obligations in full, he should opt for credit cards, as these cards provide additional benefits such as reward points, purchase protection etc.

Similarly if he is certain to meet his monthly credit card obligations in time, he would ideally derive extra grace period benefit whereby he may be required to make card payments after say 30 days, based on his billing cycle. Thus he can effectively put his cash to earn some extra bit of interest during such grace period.

Paying through credit card would also help you to constantly track your monthly expenses. Most of the card issuing companies provides ‘expenses pie chart’ wherein you can easily ascertain and track the expenses incurred for various purposes such as food, electricity, travel etc. This tracking facility would thus infuse a better financial discipline.

Drawback of paying by credit cards


One of the major drawbacks of paying by credit cards is that one might skip full payment to the card issuing company. This would effectively involve availing funding against a credit card. This approach would turn out to be the most costly proposition as the credit card companies charge substantial interest at 15%.

Thus if one consistently pays up his credit card obligations in full every month, opting for credit card payment would be a better money management technique.

Allan is a regular writer and contributor in the personal finance community. Over the years, he has written numerous articles about debt, savings accounts and credit cards. Allan holds a BA in Business Administration with a major in Finance.


Got further questions? Catch me on twitter and DM me @529SavingsPlans or e-mail me at 529CollegePlans at Gmail.comWant to be heard? Leave a reader comment below.

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