When it comes to cash versus credit, cash is losing the popularity contest. While 31% ofpurchases were made with cash in 2016, that dropped to 18% by 2022, according to the Federal Reserve Board.
Does that mean credit cards are better than cash? Not necessarily. Credit cards are generally more convenient and safer to carry, but they’re getting cardholders into increasingly deeper debt. By the end of 2023, the average credit card debt hit $6,360 — a 24% increase in two years, according to TransUnion, one of the three main consumer credit reporting agencies in the U.S.
While credit cards and cash both have drawbacks, different scenarios warrant choosing one over the other. So, you’ll want to learn when and how to use both responsibly and then decide which is best for you.
What you need to know about cash
Cash is a great default choice. Unlike credit, cash restricts you to spending money you’ve already earned, instead of making purchases and then paying the bill later. On the other hand, cash can be lost, damaged or stolen.
Advantages of using cash
- No fees: Unlike with credit cards, you don’t have to worry about annual fees, interest, transaction fees and other charges when you use cash. Some vendors even offer discounts to customers who pay with cash.
- Avoid debt: Using cash over credit helps you avoid debt since it limits you to spending what you’ve already earned instead of giving you an advance on money you might not have yet.
- Reduce your credit utilization: High credit card balances increase your credit utilization ratio and drag down your credit scores. When you switch to cash, you may have an easier time reducing your credit card debt and improving your scores.
- Better for budgeting: Studies show that people spend less when using cash instead of credit cards. One reason: paying with cash makes you more aware of the true cost of your purchases.
- Reliability: When you carry cash, you don’t have to worry about payment problems such as a vendor not accepting your credit card or a transaction getting declined by the card issuer.
Disadvantages of using cash
- Inconvenience: You might have trouble finding a nearby bank or fee-free ATM when you need to withdraw money. To avoid this issue, you’ll need to plan ahead to have the right amount in the right denominations. For example, you’ll need to carry a big wad of cash to buy a new dishwasher or fridge. But if you want to grab lunch on the way to the home store, a food truck vendor might not be able to break your $100 bill.
- No insurance: Unlike credit cards, cash isn’t insured against loss and theft. So if you’re a victim of a robbery or a scam, you’re far less likely to get your money back than if you had used a card.And if your cash burns up in a fire, there’s no chance of getting it back.
- No rewards: Some credit cards give you rewards such as cash back or airline miles, but you won’t earn any when you make purchases with cash.
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American Express® Gold Card
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BLUEPRINT RATING
Our ratings are based on specific use cases for each card. We compared this card to others in the same category and developed our rankings based on this criteria, along with our editorial input. Note that although we chose this card as the best in its category, the right card for you will depend on your own financial circ*mstances.
On American Express’s secure website
BLUEPRINT RATING
Our ratings are based on specific use cases for each card. We compared this card to others in the same category and developed our rankings based on this criteria, along with our editorial input. Note that although we chose this card as the best in its category, the right card for you will depend on your own financial circ*mstances.
Welcome bonus
Earn 60,000 Membership Rewards® points after you spend $6,000 on eligible purchases with your new Card within the first 6 months of Card Membership.
Earn 60,000 points
Annual fee
$250
Regular APR
See Pay Over Time APR
Credit score
Credit Score ranges are based on FICO® credit scoring. This is just one scoring method and a credit card issuer may use another method when considering your application. These are provided as guidelines only and approval is not guaranteed.
(700 – 749) Good, Excellent
Earn 4X Membership Rewards® points at restaurants, plus takeout and delivery in the U.S.; Earn 4X Membership Rewards® points at US supermarkets on up to $25,000 per calendar year in purchases; Earn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com; Earn 1X points on other eligible purchases
Editor’s take
Pros
- Up to $240 in combined credits for Uber Cash and on select dining.
- High rewards rate on restaurants, U.S. supermarkets, and travel.
- Generous welcome bonus.
Cons
- $250 annual fee.
- Minimal travel perks.
- Complex rewards structure.
If eating and travel are your priorities, the American Express® Gold Card could be ideal for you for its generous rewards on spending in those areas. Plus it comes with valuable perks that could offset the annual fee, if fully maximized.
Card details
- Earn 60,000 Membership Rewards® points after you spend $6,000 on eligible purchases with your new Card within the first 6 months of Card Membership.
- Earn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S., and earn 4X Membership Rewards® points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X).
- Earn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and each month automatically get $10 in Uber Cash for Uber Eats orders or Uber rides in the U.S., totaling up to $120 per year.
- $120 Dining Credit: Satisfy your cravings and earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, Milk Bar and select Shake Shack locations. Enrollment required.
- Get a $100 experience credit with a minimum two-night stay when you book The Hotel Collection through American Express Travel. Experience credit varies by property.
- Choose the color that suits your style. Gold or Rose Gold.
- No Foreign Transaction Fees.
- Annual Fee is $250.
- Terms Apply.
What you should know about using credit
Credit cards give you an advance on money that you have to pay back in the future. If you always pay the amount due in fulland on time, a credit card can be a useful and inexpensive payment tool. But if you carry a balance, using a credit card can get you into financial trouble.
Advantages of using credit
- Insurance: If you report an unauthorized purchase to your credit card issuer within two business days, your personal losses are legally limited to $50, although nearly allcredit card issuers offer $0 liability.
- Build up your credit scores: You need to have at least one credit card or loan open for six months in order to generate credit scores, and making your payments on time each month can help your scores grow. (However, it may be possible to skirt this requirement by becoming an authorized user on the account of a trusted friend or relative with good financial habits.)
- Online transactions: With a credit card, you can pay certain bills and make purchases online, instead of having to pay in person or send a check.
- Digital records: Unlike with cash, credit card transactions are automatically recorded in your online account statement, and you’ll often get an email or text receipt from the seller.
- Rewards and perks: Some credit cards give you rewards for your spending, and your card may also have a welcome bonus, purchase protection, identity theft or credit score monitoring and other useful benefits and features. Paying with a card online also allows you to “stack” rewards by shopping through a card issuer’s online shopping portal or a third-party site like TopCashback or Rakuten.
Disadvantages of using credit
- Overspending: Studies show that credit cards trigger an impulse to spend money and that using them is linked to spending more money than when you use cash.
- Increased debt: There’s no set date when you have to pay off your full credit card balance, so you may be tempted to accrue debt on the card and carry a balance from month to month, as nearly 170 million credit card holders do.
- Ultra-high interest rates: Average APR on credit cards is 22.63% as of February 2024, according to Federal Reserve data, which is ultra high in comparison to other types of financing. For example, in February 2022 the average APR on a 24-month personal loan was 12.49% and a 60-month car loan was 8.2%. But it’s also much higher than historical credit card rates, which were at 14.6% in 2021.
- Fees: Credit cards come with a host of fees, including fees for late payments, balance transfers, cash advances, foreign transactions and over-limit balances, plus annual fees and more.
- Confusing terms: Credit cards have a lot of fine print. If you don’t understand the detailed terms of your card, you could accidentally end up with an even higher interest rate or even forfeit your rewards or your grace period.
- Potential credit score damage: You can expect a major drop in your credit scores if you miss a credit card payment, and they also tend to decrease as your credit card balance increases.
Cash vs. credit: Which is best for your financial needs?
The best purchase method depends on your situation. If you need help improving your finances, you might want to use cash almost exclusively. However, a credit card can be a good credit-building tool for someone who’s committed to using it responsibly.
When to use cash
Using cash can deter you from impulsive spending. If you have trouble sticking to a budget or paying off debt, as many people do, using cash can help you change your spending habits and improve your finances. You can use a cash budgeting method like the envelope system to plan for your purchases and make sure you have enough cash for your monthly needs.
When to use credit
Using credit cards can help you build up your credit scores and earn rewards, but they’re not a good choice for everyone. Only use a credit card if all of the following are true:
- You’re committed to spending within your budget.
- You know how much you can afford to spend on the card each month.
- You will consistently pay off your full balance by the due date.
Even if you check all three boxes, the best way to start using a credit card is by making one small purchase each month and then paying it off. Eventually, once you know you can use the card responsibly, you might work up to charging more of your purchases on a credit card in order to earn rewards.
Frequently asked questions (FAQs)
There are good reasons to use both cash and credit cards. Using a credit card can help you build your credit scores and give you insurance against theft and loss, but using cash is better for people who want to reduce or avoid debt.
You may want to carry both cash and a credit card when traveling, since they’re useful in different ways. Carrying lots of cash can put you at risk of theft or loss, but it’s good to have some in case a credit card or electronic payment isn’t accepted. If you prefer cash but want to stay safe when traveling, travelers checks or prepaid debit cards offer an alternative to credit cards.
For credit cards, make sure you choose one that has no foreign transaction fees. You should also research travel advisories to see if there are places where credit card use is discouraged or blocked due to fraud.
Using cash does not help you build up your credit scores, however it can help you avoid damaging them if it keeps you from accruing credit card debt. If you’re a cash user determined to avoid card debt, you might want to consider building credit by becoming an authorized user on someone else’s account. Just make sure you trust the person and that they have good financial habits and don’t carry a large balance.
Unlike cash, credit cards have protections that limit your financial losses in the case of theft or fraud. Your card may also have purchase protection, an extended warranty and insurance coverage for certain incidents.
There are some similarities between using cash and a debit card, but they’re not the same. While a debit card allows you to draw cash from your bank account, all of your debit card transactions are insured. You may also be able to spend more cash than you have in the account by overdrafting, in which case you may have to pay overdraft fees. If fraud occurs on your debit card, you also may end up having the cash in question tied up for weeks or longer while the bank investigates.
Use credit cards with caution
Using cash can help you stick to a budget and avoid debt, but it won’t help you build up your credit scores. However, many people misunderstand the connection between credit cards and credit scores. If you want to use a card to improve your scores, you don’t need to use it often. In fact, you can build good credit by using just one credit card to make small purchases, thenpaying off the full balance every month.
