Plastic vs. Cash

The payment system in our society has evolved to a large extent. There are various ways we can pay in. Credit cards, debit cards, cheques, cash and others. Credit cards are highly popular in developed countries. However, under developed and developing ones still rely on cash. In spite of wide usage credit cards are bashed up for being the bane of spending. People claim that they make them spend more. Credit cards are very beneficial and here’s why they trump over cash as a payment option.

Cash vs Credit

Cash vs Credit photo by @armydre2008

Credit cards offer you the opportunity to use fictitious money as a loan from bank, which if you pay on time is interest free. As you spend on credit card, cash sits in your account earning an interest rate. Suppose, monthly interest rate is 2% for the bank where you hold your account in. You have $2000 in your account. Now, if you are using debit card or withdraw cash, and have only $500 remaining at the end of the month in your account then interest earned will be $10, so the balance will be $510. However, if you use credit card then you earn interest on whole $2000, and at the month’s end balance will be $2040 i.e. $40 as interest earned. You will anyways pay off your credit card balance. So, you earn more on the cash sitting in your account. At the same time you have interest free money to spend on your credit card. Mind it, you pay interest on credit card only if you default.

To entice people to buy more credit cards, banks have attached various rewards with them. Earning points which can be used somewhere else, say to purchase groceries, to watch movies or to purchase occasional sports games tickets, are common schemes. It is important to know that these schemes are real and they actually work. You should pick the cards which are in sync with your lifestyle on daily basis. For example, if you are raising a family then a reward card with usable points from groceries makes sense. However, if you are a traveler, then a reward card which earns miles for you. There are cash back reward cards too.

Credit cards help in framing a credit history for you, which can be used in future by banks to assess your timely payback potential. This helps in building trust. Credit cards are easy to use and convenient to carry. Moreover, if your back account is low on cash and suddenly there is a medical emergency to be paid off, credit cards are always there to rescue you.

On security front your credit card can be stolen but so can the money in your wallet. It will be biased to say that credit cards earn benefit only for the banks. If they weren’t being beneficial for the users, they would have been extinct by now. Use them sensibly and they can prove to be the best financial tool.

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