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Cash vs. Credit Card: Which Is the Better Way to Pay?

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Credit card offers frequently tout the benefits and rewards you earn when you spend with a card, but the perks of using credit cards aren't always enough to win the cash vs. credit card showdown. For example, credit cards can tempt us to overspend, and the interest fees can get costly if you carry a balance from month to month.

At the same time, that doesn't mean cash automatically prevails in every cash vs. credit card battle, as cash has its own downsides. Carrying cash can be a safety risk, and getting your hands on it -- particularly outside of banking hours -- can be a pain. Here's a look at both sides of the cash vs. credit card conundrum.

The case for cash

Even in today's digital world, cash still has its place. For one thing, cold hard currency is all but universally accepted, including at a number of small businesses that don't accept credit cards at all. It's also convenient at certain events where cash-only lines can be shorter and faster. And that spare $100 bill hidden in your glove box may be a lifesaver if your car breaks down and you need to call for a midnight tow.

A cash payment can also net you a deal. Some smaller retailers and service providers offer discounts to customers who pay with cash. Gas stations seem to favor the practice because the margins on gasoline are already thin before credit card processing fees are added. Plus, cash payments bring customers inside the store, where they're more likely to make additional purchases.

Hard-line budgeting is another area where cash wins the cash vs. credit card argument. Many financial pundits campaign for cash-only budgets because cash enforces a hard limit on spending. Low-tech budgeting techniques, like envelope budgets, can be extremely effective for the simple reason that once you're out of cash, that's it -- you're done spending.

When cash isn't king

Of course, cash does have its shortfalls, or there wouldn't be a cash vs. credit card debate. To start, simply carrying cash on your person can be risky, and not just for your personal safety. Cash is notoriously easy to lose or misplace, and it's exceptionally difficult to track down if lost or stolen. 

Being a cash-only consumer also has its unique inconveniences, particularly in terms of getting cash when you need it. Even though there are thousands of ATMs in the United States, they never seem to be nearby when you really need one. And if you do track one down, the fees can be shocking. 

Beyond the fees, banks tend to have ATM withdrawal limits that make it impossible to get more than a few hundred dollars in a single day. If you need more than that, you'll have to make a trip to the nearest bank branch, which is often even more inconvenient than finding the ATM in the first place. That's even if the bank is open -- which it won't be if it's a holiday or past business hours.

The case for credit cards

As useful as cash may still be, credit cards have a lot of advantages in the cash vs. credit card debate. For instance, while cash is still the most widely accepted form of payment, credit cards are accepted almost everywhere in the U.S. these days -- including some businesses that are now forgoing cash entirely.

Furthermore, many services have definitely chosen a side in the cash vs. credit card dispute. Credit cards are required by many hotels and rental car agencies when you make a booking, both to ensure they have some recourse if you wreck your room or rental car, as well as to avoid having too much cash on hand.

And while it can be a trouble spot for some, credit cards do enable you to make purchases even if you don't have the cash to pay for them at the time. This can be especially helpful if you need to buy food or pay bills while waiting for your paycheck to clear. Plus, using a credit card and making on-time payments is a sure-fire way to build your credit score.

Credit cards also come out on top when it comes to safety and security in the cash vs. credit card clash. Credit card users are protected against fraudulent credit card transactions, whereas you can kiss lost or stolen cash goodbye. Most issuers offer $0 fraud liability, so you're not on the hook at all. Even if there you are liable for unauthorized activity, it won't be more than $50.

Of course, we haven't even gotten to the rewards yet, which is the most frequent argument in the cash vs. credit card battle. Nearly all cash back credit cards offer a minimum of 1% back on purchases, with rates of up to 6% cash back for certain everyday purchases. And you can find countless tales of cardholders' credit card spending earning all kinds of free flights and hotel stays with their travel rewards cards.

Additionally, each major credit card issuer -- Visa, Mastercard, American Express, and Discover -- offers extra benefits for their cardholders, too. This can include everything from rental car and travel insurance to retailer discounts and purchase protection. 

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Our favorite credit cards

Don't you wish you could take a peek inside a credit card expert's wallet sometimes? Just to see the cards they carry? Well, you can't do that, but you can check out our list of expert-rated best credit cards. Some of these cards have unusually high cash back rates, others offer great sign-up bonuses -- we've even included some with long intro 0% interest offers. See the cards here: Best Credit Cards

Lastly, credit cards won't actually change any interest if you pay off your balance in full every month. High interest fees are often an argument against credit cards in the cash vs. credit card discussion, but this won't come into play if you don't carry a balance.

Even if you need to carry a balance, many cards offer 0% intro APR periods which allow cardholders to finance their balances at 0% for more than a year. Compared to the average rate on a personal loan -- the most likely alternative to a credit card in many cases -- this benefit can be worth hundreds of dollars on its own. 

Where credit cards fall flat

When folks discuss cash vs. credit cards, the potential for abuse is a common argument against credit cards. With average interest rates over 14%, carrying debt on your credit card can certainly get costly. Unless you have the self-discipline to pay off your credit card debt every month, you may want to stick with cash.

Another potential downside to a credit card is the annual fee. Some cards, especially those with the most lucrative reward points, will charge an annual fee to use your card. Luckily, it's easy to find a card with no annual fee, even one that offers cash back and reward points.

Credit card payments can also cost you money if transaction fees are passed onto the cardholder. So-called convenience fees of 2% to 3% are often charged if you use a card to pay certain bills like college tuition, rent, insurance premiums, utility bills, and federal or state taxes. 

A place for both

In the end, there is no one right answer to the choice of cash vs. credit cards. There is a time and place for cash and credit. Each payment method has its advantages and disadvantages -- and neither are perfect for every type of purchase.

If you don't have a problem keeping up with your card payments, credit cards are definitely a great way to make most purchases. They offer the best fraud protection, rewards on your purchases, and additional benefits like rental car insurance, purchase protection, and the ability to build credit -- benefits you don't get with cash or a debit card.

At the same time, it's always a good idea to have at least a little cash on hand. You may find yourself at a business that doesn't accept cards, or standing in a long line when a cash-only option would be quicker. And, should the power go out or the card readers malfunction, cash may be just the ticket to getting on with your purchase and going about your day.

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