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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  • Megan

    Great discussion idea! My parents taught me the credit card “rule” from an early age: the first time you can’t pay the balance off in full you cut up the card. So I’ve never carried a balance and have been able to build a good credit history (I’m 27). I think that because I had good training, and didn’t over-use my card, I’ve been able to use it as others would an ATM card. I use my card for EVERYthing from groceries to Amazon orders. The rewards program means I’m essentially getting a 1% rebate on everything I buy and it keeps me from accidentally over-drawing my checking account like I might w/ an ATM card. [I only keep a few bucks in my checking account so that my money can draw interest elsewhere]. My husband and I are very frugal and seriously weigh every purchase before we make it (we also have a good budget). I think that with all of these things in place a credit card can be really worth it! I love getting my rewards and it’s safer/easier to carry than cash. Am looking forward to seeing what others have to say!

  • Heather

    We use credit cards for nearly everything to take advantage of the rewards. But we are very disciplined about it and they are paid each month. We have a budget set up in an excel spreadsheet. Each expenditure, no matter how small (cash or charge), is entered on the spreadsheet so that we know what we’ve spent and how much is left for that month and don’t go over our limit. If you’re not disciplined enough to keep track of it this way, I think cash is the better way to go.

  • Corrie @ “Cents”able Momma

    We also use our credit cards for everything for the rewards. I use a Upromise card to earn college savings for my boys and the Costco American Express for cash back (it pays a better rewards % for gas, restaurants, and hotels).

    We do pay off our cards every month, and I don’t feel like we spend more using credit cards than we do if we used cash. I use MS Money to track our spending constantly throughout the month, plus, we don’t make impulse purchases just because they’re going on the credit card. Since we make the payments in full, we know we need to be able to afford what we buy at that moment.

    I agree that if you carry a balance that it’s not a good idea to use the credit cards for rewards, though.

  • fran

    We hardly ever use cash. We also pay off our credit cards every month. We do make out really well with the extras. We have the Discover Card also that only gives you 5% cashback on the 1st $100.00, so that’s all we put on that card each month. We also have and AT&T Universal credit card with 30 minutes free long distant calling and 2 free directory assistance calls per month, with 5% back on drug stores, supermarkets, and gas stations (but I don’t use it for gas). The other card we use is Chase where we get 1% cashback. We use that when we can’t get the 5%. My poor husband gets so confused as to which card to use for what. But in the long run, it does pay off. We’ve already gotten $400.00 in Shell GCs, $100.00 in Red Lobster GCs, 20 free movie theater tickets from Sony Card, and other stuff, too. If anyone has the Discover Gas card, you also get 5% from any car repairs, car parts (like from Pep Boys). These really add up fast.

  • It might be obvious but the other good reason for regularly using a credit card is to maintain (or improve) your credit score. When my husband and I first got married, we did not have credit cards (none whatsoever!). It made super difficult for us to rent an apartment, sign a contract with a cell phone company, and get a car loan, because as a bank told us “no credit card means bad credit score.” It seems that rarely using your credit cards can also damage your credit score. Since then, our rule is to charge about 1/10 of our credit limit on each credit card every month and pay it off on time.

  • Jen

    If you don’t have good enough credit to get a credit card with good rewards or you would just rather use debit than credit, there are other options. As an alternative, my husband and I enrolled in the Lifestyle Rewards Debit card at Chase Bank – we get points for every purchase made and can use those as they accumulate. I also have a PayPal Debit Card, which is tied directly to my bank account. Every purchase I make with the PayPal card used as credit (where you sign the receipt instead of enter your pin) I get 1% cash back. I am pretty sure there is good consumer protection for each card, but you should check that out for yourself if you are thinking about integrating them into your financial life.

  • evelyn

    We also use credit cards for everything we possibly can…we would pay our mortgage with it if the mortgage co. would let us. My husband & I have taken 3 two-week trips to Europe using the rewards we earned from American Express (redeemed for airfare) and Chase/Marriott card earned us hotel points (redeemed for very nice hotels in Germany and in Paris).
    It goes without saying that you must have discipline to pay these cards every month.
    The only time we carry a balance is if we have a zero percent rate on a card (usually the intro rate)…

  • Marin

    My husband and I have a airmiles credit card and put just about everything on it. We use it like cash. We have never carried a balance, never failed to pay it off each month. And our family pretty much flies for free, between the card and my husband’s travel. It works for us.

  • My husband and I have the Chase Freedom credit card. I love the cash-back rewards program – it’s one of the best out there.

    ps- Thanks for putting your full feed back on Google reader!

  • Gina

    If you have a Visa/MasterCard *debit* card (for your checking account) – check to see if your bank participates in the Visa/MC Rewards program. Mine does – so I can use my Visa Debit card and get rewards, too. I have to use it as a credit card when I check out (meaning press “cancel” when it asks for my PIN, and sign the receipt) – but I still earn rewards for buying groceries, getting gas, paying my various bills, etc. Some banks will charge you for enrolling, so you’ll want to check that out, too. Mine does not – they provide the service free.

  • Jennifer

    We’ve found that the Visa debit card from National City generates some great point-based rewards. We get points when we use it as a debit card or when they process it as a credit card. (Either way, the transaction comes directly out of our checking account.) We paid for my daughter’s birthday party with an Amazon gift certificate that we earned. I know from experience that building a credit rating isn’t worth the overspending that can come with credit cards. Since a mortgage is the only reason you need to worry about borrowing money, there’s no need to even have a credit score. If you don’t borrow money, you have a 0 credit score. Just find a mortgage lender who does manual underwriting. They’ll look at your total financial picture, and your credit score never enters the picture.

    So…. I highly recommend the Visa DEBIT card points program available through National City.

  • Glor

    I use my Amazon year round for every purchase. Religiously pay it in full every month. When Christmas rolls around, I have a bunch of Amazon reward certificates to use for the bulk of gift shopping.

  • We use an American Express for the sole reason of getting back the reward at the end of the year. We pay it off every month to make sure we stay on top of it. That is the only credit card we have. I think it is so funny when I get the sales calls for credit cards offering their “great” rates and my response is always I don’t use credit cards. I love the spluttering on their end…like, who doesn’t use credit cards?!? Yes, I know, astonishing, but there are more people than you realize who don’t use them. 🙂

  • Swap Savers

    This is a great question and I really think it depends on the person. If you are able to reframe from overspending and you are very organized so you can pay your bills on time then you can make a lot of money from credit card rewards. I am REALLY into it and will switch credit cards if another credit card is offering a better deal or use two or three at a time. BUT I have NEVER made a late payment or interest payment and always spend within my means. I wrote an article about it here

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  • Rachel

    I have used credit cards for the past 5 years and love the rewards I have gotten. I have had two different Delta American Express cards and received over 50,000 airline miles just for signing up and using the credit cards. I also have a Barnes and Nobles credit card and have received $50 in gift cards from using that card. i have never carried a balance, I pay all my credit cards off every month and have never had a late fee so I have never had to pay any extra fee for any of my 3 credit card. I have gotten lots of wonderful rewards with each of my credit cards. But the rewards are only worth it if you are wise with your cards and don’t have to pay any late fees or finance charges. With the B&N card, a late fee is almost $40 dollars so my $50 in gift cards would not be such a sweet deal if I had had to pay 1 or more late fees.

  • Rhonda

    I’ve followed the conversation here with interest–we’ve been married 25 years and used credit cards responsibly–paying off every month and reaping some nice rewards. However, we’ve recently switched to a chase debit card. It also comes with reward points.
    The reason? If you’re banking on a paycheck so you can pay for your charges–what happens when the paycheck is gone? We are in the construction/remodeling trade and as everyone knows with the economy being what it is–our work dropped off the table last year. There were months we had to forgo a paycheck for quite a while. Even when we were charging–though we were careful with purchases, making sure most of the expenditures were for necessities such as groceries/gas, etc~the problem arose when the paychecks quit coming in on time.
    Now, we limit our spending to cash on hand and the peace of mind is well worth it! I don’t intend to go back to credit card use, ever~

  • Yup, you hit the nail right on its head and told it as it is. Keep up the great posts. BTW, getting into a large amount of debt is a nightmare and I learned it the hard way. I’ve since then almost paid up all of my debt though and wrote about it at

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