Credit Card or Cash? What should you use?

Credit card or Cash ? This is such a common question I get from my clients, family, and friends. And my answer every single time is – “It Depends!” If this question is something that you ponder about at times continue reading.

Let me explain what I mean by It Depends when I answer this question. First off this is a personal choice and there is nothing right or wrong about this choice. If you are like my father who never trusted in credit cards and never had one his entire life (I’m not kidding) you are not alone there are millions of other people like you who steer away from using credit cards. Let’s begin by laying out the pros and cons of using a credit card and cash.

Credit CardCashAdvantages– Spend now Pay later (Interest-Free loan as long as you pay on time)
– Rewards, Cashback, and Miles
– Frictionless buying experience – No need to run to the bank or ATM before you buy the stuff you need– You buy only what you can afford
– No worrying about paying someone later
– Prevents impulsive buyingDisadvantages– Easy to get trapped in buying stuff that you don’t need or can’t afford
– Really steep interest rates if you don’t pay on time (15%-36%)
– Annual Fees– Money disappears from your account and you lose on interest or potential investment gains
–

Now that we have wrapped our head around the advantages and disadvantages of both ways to pay, I will give you my preferred ways to pay for the stuff that I buy and then I’ll walk you through the framework or a decision-making process that you can use to decide for yourself.

Credit Card or Cash?

I prefer to use a credit card to pay for most of my purchases unless the merchant doesn’t accept credit card or have a fee if you pay with a credit card like DMV in WA charges a minimum fee of $2.25 to pay with a credit card. That said I almost never use a debit card. The three cards that I use for most of my purchases are:

1. Citi Costco Card – It pays 2% cashback on all purchases at Costco and 3% of Dining and 4% cashback on Gas anywhere in the world.

2. Chase Freedom – I use this card for their quarterly 5% cashback on different categories and I make sure I use this card for only these categories

3. Fidelity Rewards Visa – This is a great card for its unlimited 2% cashback on every purchase and they can put the cashback right into your Fidelity Investment account.

Pro Tip: Never pay with cash unless you have to.

Now you know what I prefer and why. Let’s delve into the decision-making process. Before you complete any purchase at store or online ask yourself these questions

1. Do I really need this? Can I not live without it?

2. Can I pay for this today using cash? What tradeoffs do I need to take in order to make this purchase?

3. Since this blog is focused on FIRE I will give you a bonus question – What impact does this purchase have on my FIRE plans?

Once you have answers to all these questions and understand the implications of the purchase – You can use data to make an informed decision should you go ahead with the purchase. But whatever you decide make sure you are not avoiding the habits that can lead you to debt hell. After all, this is a FIRE blog, you shouldn’t be buying anything that is not a necessity and can delay your FIRE, early retirement plans.

Do let me know what is your preferred method of payment and why in comments.

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