Cash vs. credit: Which to use?

If merchants go cashless (or limit themselves to cash-only transactions), you might not have to decide on cash or credit. But if you have the option, the answer might go beyond what you’re buying.

What you’ll learn:

• Credit cards offer the potential to earn rewards, build credit, access digital tools and offer security features, including fraud protection.

• Cash could be useful for small, in-person purchases, especially if a merchant offers cash discounts.

• Building credit with a credit card requires responsible use, such as paying statements on time every month and keeping balances low.

• Using a credit card involves borrowing money, which may be subject to interest charges. But you can typically avoid interest on new payments by paying off your monthly statement.

If a merchant accepts cash, it’s a simple option. Maybe you want to tip a driver or a waiter. Or your favorite vendor at the Saturday market prefers cash. Sometimes cash can just feel easier.

When you pay in full with cash, there’s no potential interest down the road. And you might avoid transaction fees. But compared to using a credit card, simplicity may not always be for the best. Using cash means there might be:

• No opportunity to build credit: Payment history is the most important credit-scoring factor. But using cash doesn’t directly offer an opportunity to have activity reported to affect credit scores. 

• Greater risk if lost or stolen: Carrying a large amount of cash opens up the opportunity for theft. Unlike a credit or debit card, there’s less recourse for you if you lose cash.

Credit cards might offer rewards, spending flexibility and more. That can make them good candidates for everyday spending, big-ticket purchases and everything in between. But because they involve borrowing money, there’s more to consider if you’re deciding whether to use cash or credit.

There can be many advantages to using a credit card. But there are potential pitfalls if you’re not using a credit card responsibly.

• Rewards: Earning miles and cash back can make using a credit card attractive. But if you’re overspending or paying interest to chase rewards and bonuses, they may not be worth it. Paying off your balance every month is one way to minimize or avoid interest charges. 

• Credit building: Building credit can put you in position to qualify for more rewarding credit cards at better terms. But missed payments and high balances can have the opposite effect—not to mention other penalties. Thankfully, issuers like Capital One offer digital tools you can use to help manage and budget.

• Protection and security: Unlike cash, misplacing a credit card doesn’t have to feel like a lost cause. Federal law limits cardholders’ responsibility for unauthorized charges. And cards also have features like fraud alerts, card lock and virtual card numbers. Depending on the card, extended warranty protections and travel insurance and other coverages might be available too.

If you’re still choosing between cash and credit cards, here are some answers to common questions.

Decisions about when to use cash or credit depend on what you’re buying and who you’re buying it from. If you think credit is the right choice for you, you can see if you have guaranteed card offers before accepting. Checking is quick, and it won’t hurt your credit scores.