But could using only cash really help you get out of debt? Not necessarily. If getting out of debt is your goal, there are three tried and true habits to keep in mind:
1. Spend less money than you take home each week.
2. Build an emergency savings account.
3. Develop and follow a get-out-of-debt plan.
Here are some of the potential pros and cons to consider when using either cash or credit cards:
Potential cons of using cash
One of the biggest disadvantages of carrying cash, of course, is that you can lose it. If you lose your credit card, you can cancel it and get a new one. Not so with cash. Also, if you use an ATM to withdraw cash, you may be charged fees, which is like throwing money away. Worst of all, flashing cash can make you a target for thieves.
Some pros to using cash
A great technique for getting spending under control is using what is known as the “envelope method,” where you have an envelope of cash for each different category of spending. For example, you might use an envelope specifically for food expenses, such as groceries and eating out, another for clothes, and a third for transportation.
You may also want to have an envelope for discretionary (fun) spending. It is OK to spend money on things you like or things you like to do—the key is to budget for those expenses just like you do for your savings, rent, credit card payments and other expenditures. With this method, you are only allowed to spend what is in the envelope and not a penny more.
Potential cons to using credit cards
If you continue to use credit cards and you don’t have your spending under control, you may never get out of debt—it’s that simple. But even if you do have your spending under control, you still may be tempted to use credit cards the wrong way.
Balance transfers with introductory or teaser rates are a good example. It may sound enticing to consolidate your credit card debt with a balance transfer offering a low introductory rate, but you should always read the fine print. The 0 percent promotional rate is typically just that—a promotional rate that may not last forever. These offers typically last anywhere from six to 12 months and then the rate increases, often to a higher rate than you had on your old card.
In addition, there are usually transfer fees, which typically are around 3 percent but can be much higher. Make sure you understand these fees before consolidating your debt. There are online calculators you can use to see if transferring balances to a new card will really help.
Finally, if you do decide to consolidate your debt, you may want to consider paying more than the minimum payment due. Consider making your payments on the new card, at a minimum, equal the payments you were making on the old cards. In other words, you may want to avoid consolidating your debt and then paying less toward it.
Some pros to using credit cards
You can make credit cards work for you if you are disciplined. For example, there are credit cards where you can earn unlimited cash back on everyday purchases, with no expiration and no limit on how much you can earn. As always, make sure you read the fine print, as there are often annual fees for these credit cards.
The main thing to keep in mind is this: If you use a credit card with rewards, you still want to pay the balance in full. It will defeat the purpose of getting rewards if you have to pay interest, which could be more than the value of the rewards.
Building your credit, of course, is another benefit, and it’s very hard to build your credit history if you use only cash. Additionally, there are some circumstances in which you might want to use a credit card, such as booking a hotel or renting a car.
Remember, whether you use cash or credit, getting out of debt is only possible if you build a plan, spend less money than you earn, build your savings, and stick to it.
Steve Repak is a CERTIFIED FINANCIAL PLANNER™ professional, CFP® Board Ambassador, and financial literacy speaker. He is also an Army veteran and the author of Dollars & Uncommon Sense: Basic Training For Your Money. Follow him on Twitter: @SteveRepak
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