Cash or Credit? Which to Choose.

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I remember standing in line at the Quick Shoppe by Peakes on my way Down d Islands. My mission was to buy a few club sodas and a newspaper. You know the drill.

Anyway I was behind a woman who whipped out her credit card to pay for an Express and a coke. I rolled my eyes to the ceiling as I thought… “Hmm, North people yes!” I am a ‘South’ girl and, at the time, ascribed to the notion that “northern folk” really are a different breed.

That was about two years ago, but just last week I found myself doing just what that lady did – reaching for my credit card to pay for small and sundry Quick Shoppe items. The revelation that the use of credit cards had become so commonplace that I was now unwittingly using my card for the tiniest purchases – a practice that hitherto prompted looks of scorn – prompted a bit of analysis. Is it wise to use cash or credit and are there times when one is better than the other?

Each has its advantages and disadvantages.

Pros of using cash: Limits overspending. No extra fees.

Shopping with cash definitely helps to limit your overspending. When you pay in cash you can only spend what you have. There is no way you can buy something you can’t afford because you just won’t have the money to complete the purchase. Additionally, when you use cash you don’t need to look beyond this month because there is no time lag between what you have spent and what you owe. That 30-day, no-interest grace period can be a pain when you forgot how much you spent, and have to repay at the next billing cycle.

When you use your own cash, there is no fee. The bank isn’t going to charge you for ‘going over your limit’ when you use cash. A definite plus to shopping with cash is that there are no fees attached, so you don’t end up spending the cost price of your purchase plus interest or other fees.

Cons of using cash: No rewards. Safety risk.

If you’re big on getting ‘something for something’, then acknowledging that you won’t get any rewards from paying in cash (besides from the tangible pros listed above). No one is waiting to give you bonus points for shopping with your own cash, and you won’t get airline miles than can get you a trip to Jamaica.

Rewards aside, and bearing safety in mind, it’s not always best to walk around with wads of cash. Walking around with cash can be risky because if you are robbed, there is no real recourse. If your credit cards are stolen, however, you can have them cancelled immediately.

Pros of using credit:Convenience. Rewards. Traceable.

It’s so convenient to use a credit card. All you need to walk with is a form of ID and then you don’t have the nuisance of walking with cash or storing change. Credit cards are accepted almost everywhere.

Additionally, if credit cards are properly managed they can rack up some nice rewards for spending on items you would have bought anyway. It certainly is nice to get a couple hundred dollars worth of points to take to the grocery because you used your credit card throughout the year or to fly for free on the value of your travel miles. While overspending is a pitfall for many credit cardholders, owning a credit card can in fact help you to track your financial behaviour. Using your credit card for certain budget categories means that all your purchases are on one convenient statement. If you want to trace how much you spent at Hi-Lo for instance, at the end of the month, you can whip out your credit card statement and just add up your bills. Acting as your personal, financial diary, these statements help you to track spending and to note areas where you need to curb your enthusiasm.

Cons of using credit: Fees. Creates shopaholics.

When you accept a credit card, you agree to pay an annual fee that averages around $250, and your purchases are subject to high interest charges if they are not paid off in full by the due date.

Average interest rates on credit cards can be in the range of 24% per annum, which means you are charged 2% per month on your outstanding balance, which is then rolled for the following months. To put this into perspective a bit, the interest you earn on saving in an average money market account is about 2% per annum. Bank accounts pay you much less than 2% on your deposits. When you allow your credit to rack up high figures, even if you convince yourself that you are saving money otherwise, the fact is that you’re spending way more on debt.

It also doesn’t help that a credit card pretty much provides the illusion that almost everything is affordable. While the convenient access to credit is great if you are in a bind, if you have problems controlling your spending, it could be the beginning of your financial woes.

Easy access can be a shopaholic’s greatest dream turned worst nightmare. When you use a credit card, it is very easy to live beyond your means by taking advantage of the payment grace period, or worse, stretching it out by making only the minimum required payments.

The decision to use cash or credit has to be a personal one. There are advantages and disadvantages to using both, so you have to assess your need, and, of course, your level of discipline, and then use the option that minimizes your risk while maximizing your potential benefits. So the next time I stop by a Quick Shoppe, I’ll think twice about pulling out that credit card.

Natalia Jones publishes dcaribbeanentrepreneur.com, which features business tips and news for upcoming entrepreneurs across the Caribbean.

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