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In the wake of the big Target and Neiman Marcus data breaches, you may be wondering if cash payment is the way to go. After all, if you pay with cash, there’s no debit or credit card information for hackers to steal.
In addition to protecting you from this type of information theft, paying with cash can also be good for your financial health because it encourages you to spend less. According to a study conducted by Drazen Prelec and Duncan Simester, business professors at MIT, customers are willing to pay more for items when they are using credit cards instead of cash.
Unfortunately, paying with cash isn’t the perfect solution to your identity theft and money management concerns. It has its downside, too.
Credit tips: Paying with cash vs. credit card
You can lose your cash. You can also lose your credit card, of course, but you can always order a new one—which shouldn’t cost you anything.
Your cash can get stolen. While your credit cards can also be stolen, you can cancel them and order replacements. Federal regulations provide protection against fraudulent charges, so if a thief is able to use your card, you may not be responsible for the charges.
You could face withdrawal fees. If you fail to take cash out at one of your bank’s ATMs and decide to use an unaffiliated machine, you could face fees. To give you some perspective, paying $2.50 to withdraw $20 is the equivalent of paying 12.5 percent interest.
You aren’t using your credit. While this may sound like a pro, the problem is that your credit score could suffer if you aren’t building any credit in your name. Building a positive credit history requires some credit usage, and without a credit history, you may find it hard to get loans, such as those for cars or homes.
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Your credit or debit card data can’t be hacked because you’re not using it. If you use cash at checkout, there’s nothing for hackers to steal.
You may be more mindful of your spending. Breaking a large bill hurts more than swiping a card. If you have a spending problem, consider trading your card for cold hard cash.
You can’t spend what you don’t have. Unlike a credit card, which allows you to spend more than what you actually have in the bank, once your cash is gone you aren’t able to spend any more.
I know some readers will talk about mileage, points, and so on, and how it might be easier to track your spending when you use a credit card. At the end of the day, you have to decide which payment method is best for you. Let us know what you think about purchasing items with either cash or credit.
Steve Repak, CFP®, is the author of Dollars & Uncommon Sense: Basic Training for Your Money.
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