In 2022, 77% of American adults had at least one credit card, with the average number of cards per consumer coming in at 3.84. In the last three months of that same year, Americans collectively carried $986 billion in credit card balances. Considering the stress and strain of having credit card debt, you might wonder, "why do people use credit to pay for things instead of simply using cash?"
The truth is, there’s a long list of reasons why people choose to use credit cards for all kinds of purchases.
In some cases, an individual might choose to use credit cards for reasons that aren’t indicative of a debt problem, such as the additional security, convenience, and access to rewards and perks. Other people, though, might use credit because they have entered an unmanageable debt cycle.Let's take a close look at why credit cards can be beneficial to your financial health. At the same time, we’ll examine the risks that they can pose when consumers aren’t careful to use them responsibly.
There are some pretty compelling reasons to use credit instead of cash, at least in some situations. Here are some of the most common justifications for making purchases using credit cards rather than cash, debit cards, or checks.
The most common form of identity theft is credit card fraud. While this might sound like a reason not to use a credit card, the truth is that the major credit card networks offer strong protection against fraud.
Credit cards, in general, offer better fraud protection than debit cards. This means that you'll be less likely to be responsible for transactions made by fraudsters with a credit card than a debit card. In terms of cash, cash that's stolen from you is, most likely, lost and gone forever.
Sometimes it makes sense to make big purchases with a credit card. This can be particularly useful if the card you’re using has a low interest rate or an introductory 0% interest rate.
Beyond that, though, credit cards can help protect major purchases. The reason for this is that many issuers will offer extended warranties and purchase protection.
When you use cash, of course, there’s no additional purchase protection or warranty beyond what is offered by the manufacturer or retailer. For this reason, it can make sense to put certain purchases on a card to help provide further protection.
It’s possible to use a credit card to pay for things you don’t have the money for right now while still avoiding paying interest, even without promotional 0% APR cards. The reason for this is that there is a grace period, which is the period of time between when you made the purchase and the due date of the bill.
If you pay off your card in full by your due date every month, you can avoid interest charges entirely. This means that, depending on when during your billing cycle you make a purchase, you can defer your payment for up to 30 days without racking up any interest.
Even if you have the money in your bank account to pay for the purchase you’re making, some people might use credit cards instead of cash in part because of the concept of the time value of money (TVM).
This notion assumes that having a dollar right now is more valuable than having a dollar down the road because of factors like interest rates and inflation. While deferring payments by only thirty days might not sound like that much, it can free up your cash for other purchases and investments in the present.
One of the primary reasons that people will use credit in order to pay for things rather than cash is that it’s often more convenient.
If you only use cash, it means that you have to carry enough with you at all times to make sure you can purchase what you need. When you have a credit card, you know that you’ll never be caught without spending power so long as there’s available credit on your account.
Another reason someone might use credit to pay for things instead of cash is that the card can give them access to more money than they actually have at the moment. This isn’t necessarily always a bad thing– for example, you might choose to purchase a dishwasher for your home using a low-interest rate or 0% APR card with a plan to pay it off over the course of the next few months. If you have a clear, attainable, realistic strategy for paying off your credit card balance, it isn’t the end of the world to use credit cards to purchase items you don’t have the cash for.
For example, the average American has more than $22,000 available to them across all of their credit cards. If you have a $20k credit limit and you start using your card without giving any thought to paying it off, you’re going to find yourself in a rough spot if you’re not pulling in a pretty healthy monthly income.
Another common reason that some individuals prefer using credit cards rather than cash is for safety reasons. For example, if they were robbed or lost their wallet, there’s a high likelihood they’ll never recover the cash they had on hand.
Some people also reasonably feel vulnerable when their wallet is brimming with cash. Credit cards, on the other hand, are small and discrete.
If they lose track of their credit card, though, they won’t be (in most cases) responsible for purchases made by unauthorized parties. Having someone make fraudulent transactions using your account can definitely be a big headache and take some time to clean up, but you typically won’t be liable for the payments made on your account fraudulently.
Let’s face it– it’s pretty hard to keep tabs on your budget. Living in the modern world means making lots of little (and not so little) purchases every month, and keeping track of all of your spending can feel like having a second job.
When you use a credit card rather than cash, though, you have a record of all of the purchases that you’ve made with that account. You can usually see your transactions nearly instantaneously, and many credit card issuers will even categorize your purchases based on the type of company.
Many of the biggest credit card companies will also let you create reports that break down where your money has been going each month. If you use one of the popular budgeting apps like You Need a Budget or Mint, you can easily import your credit card data into the app to help track your spending.
Some credit cards will run promotional offers where you can make purchases or balance transfers with low or no interest rates for a period of time. When used responsibly, this can be a great way to pay for larger purchases over time without having to pay much in the way of interest, if any.
Though not all credit cards offer rewards programs, many of them do. Depending on how much money you spend on your card, it’s possible to earn hundreds or even thousands of dollars back every year. There are lots of different programs out there geared towards different types of consumers, including:
It’s important to understand, though, that credit card rewards are only really worth it if you aren’t carrying a balance on your account every month. If you’re paying steep interest rates, the benefits of these credit card rewards can easily get overshadowed.
First of all, it’s important to note that you can have good credit without having a credit card. Other tools you can use to establish and maintain a healthy credit score include:
That being said, the single best way to increase your scores is through the responsible use of a credit card. Improving your credit can legitimately change your life, as it can impact your ability to get an apartment, a loan, a line of credit, or even a job.
Remember, it’s important to make sure that you are always paying your bills on time and keeping your balances low when you have a credit card. Otherwise, it can end up doing more harm than good to your credit.
For some types of transactions, using a credit card might not be advantageous.
Whenever you use your credit card, the card issuers charge a merchant fee. The merchant (aka the business you’re making a purchase from) is expected to pay this fee in order to cover the cost of processing the payment.
In some instances, businesses will charge a surcharge to the customer to pass the cost onto the consumer. For example, you’ve probably encountered a gas station or convenience store with a sign on their card reader that said something along the lines of “a 3% surcharge will be added to purchases under $5.”
Businesses will also sometimes charge a convenience fee, which is a fee that is applied when a customer uses a non-customary form of payment. For example, you might be able to pay a bill for no additional fee over the phone, but using an online platform to pay will cost an additional few dollars.
The following expenses often come with a transaction fee if you’re using a credit card:
If you’re planning on applying for a loan or line of credit, you’ll want to be careful racking up too high of a balance on your credit cards.
For example, if you’re trying to buy a house, mortgage underwriters will usually be very wary of changes in your creditworthiness during the time between your initial application and the closing. Your credit score could drop if your credit card utilization goes up, which could impact your ability to qualify for a loan.
One of the dangers of credit cards is that they can potentially give you access to money that you can’t actually afford to pay back.
If you know that you can’t afford a specific purchase, you shouldn’t use a credit card just because you have available credit. Debt can get out of control faster than you might imagine when you don’t have the cash flow to pay your balance every month.
For some large purchases and big bills, there can be room to negotiate and come up with a payment plan or other arrangement.
For example, if you’re facing significant medical bills it could be advantageous for you to set up a payment plan rather than get hit with your card’s interest rate. In some instances, you can even get the balance reduced depending on the circumstances.
Though there are benefits to using credit cards, there are also some serious risks.
If you aren’t careful, using credit cards can lead to unmanageable debt accumulation. There are a number of ways this can happen:
Though carrying cash with you puts you at risk of losing your cash or having it stolen, no thief will be able to steal your identity by getting their hands on your stack of Benjamins.
Using credit cards, however, does carry some risk of identity theft. The information from your credit card online or IRL leaves you vulnerable to identity theft and credit card fraud.
There are usually high-interest rates associated with credit cards. Because it’s an unsecured debt, the rates are a lot higher than when you take out a secured loan like a home loan or an auto loan.
We’ve already mentioned this a few times, but it bears repeating– if you don’t pay off your balance in full every month, the interest can really start to stack up. When you’re only making minimum payments, it can take an outrageous amount of time to pay back what you owe. In the meantime, you’ve handed over a lot more money to the credit card issuer than you originally borrowed.
For example, let’s say that your credit card has a 22% APR and the balance is $4,000. You’re only making minimum payments, which are 2% of the balance ($80). With these numbers, it would take you decades to pay off this $4,000 balance, and you would end up spending potentially as much as $37k in interest.
Some credit cards have annual fees, cash advance fees, and/or balance transfer fees. It’s always important to look at the fine print before taking out a credit card, transferring a balance to a card, or taking out a cash advance.
Using a credit card responsibly is essential to ensure you don’t accumulate debt or harm your credit. Some people struggle to keep credit cards with them, as the immediate access to funds makes them more likely to make impulsive purchases that they wouldn’t otherwise make.
For some people, using actual cash helps them recognize that they’re spending their hard-earned money. When they use credit cards, the sense that the money is going to eventually come out of their pocket is more abstract. If you’re one of these people, minimizing your credit card use might be a good idea.
Though this is somewhat related to impulse purchasing, it’s worth also noting that credit cards can tempt people to rack up a balance they really can’t afford to pay. They might justify it through an unreasonable assumption that they will have access to more money next month, or they might not have a realistic sense of their income and expenses.
Some people might choose to use cash whenever possible due to privacy concerns associated with using credit cards. Some of these concerns include:
Though responsibly using credit cards can help you improve your credit, irresponsible use of credit can wreak havoc on your credit score.
Not only can a lower credit score make it more difficult to borrow money in the future, but the negative marks on your credit file can be red flags to future lenders.
To wrap things up, there are a lot of different reasons why some people might choose to use credit rather than cash to pay for purchases. Some of these reasons are indicative of irresponsible borrowing, for example, being stuck in a debt cycle. On the other hand, there are lots of financially responsible reasons to use credit, including increased safety and security, additional perks and rewards, and the ability to improve one's credit score.
Having a credit card and paying off the balance in full every month can help you create a strong credit profile. On the other hand, racking up credit card debt, missed payments, and collection accounts can destroy your credit.
Whether you’re on a mission to build credit from the ground up or improve your credit after a few bad years, you’re in the right place. Make sure you check out our Credit Building Tips blog for more useful resources to help you in your journey to financial health.
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