Pros, cons of using credit cards for everyday purchases

Some use cards for everything, while others restrict usage for certain purchases

Sally Herigstad
Personal Finance Writer
“To Her Credit” columnist and expert on women's personal finance issues

Pros, cons of using credit cards for everyday purchases

You can use credit cards for almost every purchase. But should you?

It’s not always an easy choice, and habits play a role. Your preference for cash versus plastic may have more to do with your age than with having weighed the pros and cons of either choice.

“In most cases, making large or small purchases with plastic is a generational preference. The younger generation, from age 18 to 36, prefers using plastic as their default payment choice. Older seniors primarily use cash for purchases of $5 or less,” says Natasha Rachel Smith, a personal finance expert at TopCashback.com.

According to a 2017 CreditCards.com poll, the number of consumers who use credit cards for small purchases varies dramatically by age. Of those in the 18-36 age group, 53 percent prefer to pay for $5 items with a debit or credit card. Among baby boomers and seniors, however, 70 percent prefer to use cash.

USING CREDIT FOR EVERYDAY SPENDING: 5 PROS, 5 CONS
PROS CONS
  1. Maximize rewards points.
  2. Add positive information to your credit score.
  3. Reduce the amount of cash you carry.
  4. Track purchases more accurately.
  5. Card purchase protections.
  1. Danger of overspending.
  2. Increased risk of fraud.
  3. Retail restrictions for small purchases.
  4. You’re carrying large card balances.
  5. Not all merchants take plastic.

Who is right? It may depend on whom you ask – and on your own situation and spending habits. Read these five pros and cons, and then decide:

Pro: 5 reasons to use a credit card for every purchase

1. Maximizing rewards points.
This may be the most common reason for using your credit card for everything from your morning latte to late-night shopping. The more purchases you put on your card, the faster rewards points add up.

“Credit card companies have ramped up reward programs to provide cardholders with extra incentives to swipe, including travel points, cash back and more. This is a great way to get something back for all the purchases you’re making,” says Andrea Woroch, a consumer and money-saving expert.

Don’t forget to read your card’s policy and opt in to any bonus reward options when necessary.

“For example, my Bank of America card provides cash back for all purchases,” Woroch says, “and if I wait to redeem them until after I’ve collected over $300 in rewards, they give me an extra 25 percent back. That’s huge!”

2. Help build your credit score.
To build a great credit score, you need to demonstrate that you can use a credit card responsibly. The largest element (35 percent) that plays into the credit scoring model is your “payment history” – in other words, your pattern of using credit and paying it back on time.

There’s no need to buy large items or go into debt – charging inexpensive items you have to buy anyway works just fine.

“Making small purchases on your credit card can be convenient and helpful if used responsibly,” Smith says. “If you are a disciplined borrower, making small purchases on your card and paying the amount in full every week or month can result in a credit score spike and help you build a healthy credit history.”

“If you are a disciplined borrower, making small purchases on your card and paying the amount in full every week or month can result in a credit score spike and help you build a healthy credit history.”

3. You can carry less cash in your pocket.
The more cash you carry in your pocket, the more you stand to lose.

Credit cards are safer, if used responsibly. Under the Fair Credit Billing Act, you can be liable for unauthorized use of your credit card of up to $50, but most issuers offer zero liability policies for fraudulent purchases.

4. Better tracking of purchases.
When you spend cash, you can end up with a pile of receipts to sort for recordkeeping and tax purposes. With credit card spending, it’s all on your monthly statements. (You may still need your receipts for more detail.)

If you run a business or have a real estate rental, for example, simplify your recordkeeping by using a separate card for each purpose.

“I have a credit card that I only use for my vacation rental property and one I use solely for business purposes,” Woroch says. “This makes my life tremendously easier since I can categorize spending and expenses based on those separate accounts instead of fishing through one card to pull information.”

Running all your expenses through your credit card account can help you keep your budget on track. It can even make it easier for couples to share expenses.

“For couples who don’t want to merge bank accounts, using a credit card for shared expenses is a great alternative. This way, you can still have your ‘own money’ in separate accounts for personal splurges, but keep up with the purchases you split like groceries and cable,” Woroch says.

Many credit cards help you track your spending in certain categories. Or, you can download information from your financial accounts to a budget app such as Mint.

5. Consumer protections.
You may not feel you need return protection on that morning doughnut, let alone an extended warranty available from your credit card. But you should consider using a credit card that offers those additional purchase protection benefits for when something goes wrong.

Think about your chances of wanting to return something before you pay cash.

“Today’s retailers can often track purchases made with a card even if you don’t have the receipt, making returns much easier. If you pay with cash and make a return without a receipt, you could get stuck with store credit for the lowest current selling price of that item,” Woroch says. 

Cons: 5 reasons NOT to put every purchase on a credit card

1. Danger of overspending.
It’s oh-so-easy to make an impulse purchase with a credit card. It’s practically painless (until the bill shows up, of course). Using cash, however, you see the money leave your hand. And if you don’t have enough cash, you have to go to the bank or ATM. That can slow down an impulse buy long enough for you to have second thoughts.

Wilson Muscadin, certified financial education Instructor and founder of the blog “The Money Speakeasy,” tells millennials to use cash if their goal is to reduce spending.

“Using cash creates more friction between an individual’s decision to buy and payment. The more friction, the more opportunity for money to stay in your pocket,” Muscadin says. “Studies have shown that people spend 12 to 18 percent more by using credit/debit versus cash. Using cash is like paying yourself that amount of your spending each month.”

Another way to look at the effect using cash has on your daily spending habits is to compare it to eating habits.

“When you eat, it takes approximately 20 minutes for your brain to register that your stomach is full. That 20-minute delay can cause us to overeat,” Muscadin says. “One of the biggest difference between using cash versus credit cards is a similar delayed effect. You may not feel the effects of your combined credit card spending until your statement arrives a month later. That delay encourages overspending.”

2. More potential risk of fraud.
Your information can be compromised any time you use your card. While your card details can be compromised even when used at a major retailer you know and trust, think twice about using your card where you have any doubts.

“Making purchases in less secure venues increases your chance of your information being stolen,” Smith says. “Cash, on the other hand, doesn’t have any ties to you.”

“When you eat, it takes approximately 20 minutes for your brain to register that your stomach is full. That 20-minute delay can cause us to overeat. One of the biggest difference between using cash vs. credit cards is a similar delayed effect.”

3. Retail restrictions for small purchases.
Some stores don’t allow you to use credit cards on very small purchases because their cost for processing the charge may be greater than their profit on your purchase.

In fact, Pablo Solomon, a designer and expert on buying art as an investment, says that small businesses hate it when you pay with a credit card for chump change items.

“The credit card company gets a percentage of every sale – which is not all bad on a big purchase. But for small charges, they often have a minimum fee [they have to pay to the card issuer].” Solomon says, “If you like your small-business person, pay cash for small purchases.”

4. When your card balance is near its credit limit.
Credit utilization, which is the amount of debt you are carrying relative to your card’s credit line, accounts for 30 percent of your FICO score. The closer you get to maxing out your card, the more your credit score is going to suffer.

Plus, adding to an already burdensome debt isn’t going to do you any favors. When your debt load is high, it’s best to put the cards away while you chip away at the balances and use cash or debit and live within your means until your card debt is under control

5. When credit cards aren’t accepted.
With the advent of mobile payments, more merchants accept plastic than ever, but there are still circumstances when cash is king. From traveling abroad or even browsing at a local garage sale, cash may be the only payment method accepted.

Someday, we may have a cashless society. Until then, it’s not a bad idea to have a little cash on hand – just in case.

When you make a small purchase, either cash or credit will do. The important thing is for you to understand the risks and advantages of either method. Choose the payment method that works best for you and helps you stay in control of your total financial life.

See related: Why we love that giddy high of a good card splurge, Paying by cash won’t build credit score, 6 habits of successful rewards experts


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Updated: 11-25-2017