Reader Question: Cash or Credit?

I recently received the following question from reader Charlene:

I was wondering if you’d be willing to share your opinion on paying cash vs. credit cards. We have zero cc debt and want to keep it that way- the cc companies always seem to change things so that no matter how careful you are they can squeeze some fee/charge out of you. I am wondering though if I am missing out on perks such as cash back rewards by not charging monthly expenses on the card. Would love your thoughts.

After a lot of hard work and sacrifices my husband and I were able to pay off our credit card debt left over from our college years ago back in 2003.  It’s been many years since we have carried a balance.  However we still use our credit cards (each one has one) for two main reasons:

  1. To protect ourselves against Identity Theft when purchasing items online
  2. To Take advantage of cash back programs

I am not going to deny it, even our limited use of credit cards makes it very easy to overspend.  Particularly because you don’t see the money coming off your bank account the same way you do with a debit card.  To prevent that we have worked very hard to really narrow down the situations when we use credit cards to pay for our purchases and to make sure every month our budget includes a pretty good estimate of credit card charges.  I also think that if you currently carry a balance you should avoid using your credit cards to accumulate rewards.  Chances are you will continue to keep adding to your balance, offsetting the benefits of any rewards program.

For many years my husband and I used Discovery Open Road to take advantage of their gas and auto rebate (5% for the first $100 purchase and then 1% cash back afterward).  But after this article on Consumer Reports back in July of 2008, we switched to Chase PerfectCard (6% for the first 90 days and 3% afterward but max of $15 monthly).  At the time when gas  was $4.50/gallon, any little bit of savings counted.

I think that taking advantage of the right rewards program can be a smart move if you are disciplined about when you use your credit cards and diligent about paying off the balance every month.  What about you?  Have you completely sworn off credit cards or are you still working towards debt freedom?  I would love to hear how you make credit cards work for you.

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