It may seem old school to whip cash out of your wallet to pay for your purchases. But there are times when good-old greenbacks can actually be a better way to pay than tapping your credit card. While credit can be a quick and convenient way to pay, using cash for many of your routine transactions can be more secure. Paying in cash can also help you save money, stick to your monthly spending budget, as well as avoid savvy marketers.
Read on to learn when it’s better to pay with cash and when plastic may be the ideal way to go.
Related: 10 personal finance basics
The Benefits of Cash
1. You May Get a Discount
You may be rewarded for paying cash, like paying a lower price at the gas station or when you get take-out at a restaurant.
Many businesses pay a fee for accepting credit and debit cards, so they may be willing to charge you less if you’ll pay in cash. If you frequently fill up your tank, saving even 10 to 20 cents per gallon can add up to significant savings over time.
2. It Can Help You Avoid Overspending
When you tap or swipe your credit or debit card, you don’t physically see your money leaving your account. Since there’s no sense of immediacy or consequence, it can be easy to spend more than you originally intended. If, on the other hand, you leave home with only the amount of money you need for the day in cash, your spending is likely to be more mindful and you may have a better chance of sticking to your budget.
Recommended: 9 tips to stop overspending
3. There are Fewer Security Risks
Yes, someone could rob you when you are carrying cash. However, there is less risk of identity theft or your information getting stolen when you pay with cash vs a debit or credit card.
4. You Can Avoid Fees
Cash is a one-shot deal: The purchase you made won’t end up costing you a penny more. With credit and debit, however, you can end up paying additional charges down the line, from late fees and overdraft charges to interest payments on debt.
Recommended: How to avoid overdraft fees
Times When You Should Pay in Cash
1. Your Tab is $10 or Less
It can be a good idea to carry cash for small purchases. Many retailers have a minimum amount of money you must spend in order to use debit or credit. If your purchase is under, you’ll have to throw in extra things you probably don’t need to meet the minimum.
2. When Shopping at a Small or Local Business
Small businesses often offer discounts for cash payments since it helps them save on bank fees. This can be an easy way to support your local businesses and save a few dollars at the same time.
3. You Want to Keep Advertisers at Bay
You may have noticed that after you buy something with a credit or debit card, you often get hit with ads and offers for similar products. That’s because retailers can track their customers’ spending and share their information with a third party, who can then target them with ads. This can be annoying … and also lead to more spending if you’re enticed by an offer. Using cash makes it much harder for businesses to collect and share your information.
Times When You Shouldn’t Pay With Cash
1. Buying a House
If real estate is hot where you live, you may be tempted (if you can) to plunk down cash to ensure you get that dream house before someone else does. While buying a home with cash vs getting a mortgage may get you the house, it may not be the most prudent move in the long run, especially if it wipes out all of your savings.
A mortgage has tax benefits and timely payments can help you build good credit. Also, there could be better uses for all that cash, like investing in the stock market or elsewhere.
2. Business Expenses
If you own your own business, have a side gig or do freelance work, it can be better to use credit (or even a check) to pay for business-related purchases. You’ll likely want a paper trail so you can deduct these expenses on your tax return. Another potential perk of using credit is that it may offer some purchase protection in the event that something you buy for your business that breaks or gets stolen soon after you purchase it.
3. Paying Service Providers
You may think a service provider, whether it’s an electrician or an auto mechanic, did a good job, but only time will tell. Using credit can offer you some protection in the event that you experience problems with a service after you’ve already paid for it.
4. Renting a Car
Often, your credit card will provide insurance on car rentals, but only if you use that form of payment as opposed to debit or cash. Using credit for the car rental can help you avoid paying for something you don’t need to purchase.
Recommended: 10 tips for the cheapest way to rent a car
5. You’re Looking to Build Credit
If you need to build your credit score, one way to accomplish that is to use your credit card on a regular basis and show that you’re responsible by paying what you owe each month consistently and on time.
6. When Buying Electronics
Using your credit card instead of cash for electronics can be a big advantage if your credit card offers extended warranties as a cardmember benefit. This allows you to get peace of mind without having to pony up for the store’s warranty. And you can simply pay off the balance as soon as the bill comes.
7. You’re Looking to Track Your Spending
If you’re looking to see where your money is going so you can track your spending and set up a monthly budget, it can be easier if you pay with credit or debit. Your financial institution may even offer you a pie chart of your spending broken down into categories. Seeing everything in black and white can help you become better at budgeting.
Alternatives to Using Cash
1. Cash vs Credit cards
A credit card can be a good alternative to cash if you are able to pay it off in full every month (and you actually do so). If managed well, credit cards, even secured credit cards, can help you build credit to buy a home or another large purchase in the future.
2. Cash vs Debit cards
A debit card can be a good substitute for cash as long as you know there’s money in the bank. By using a debit card, you’re not incurring any new high-interest debt. As long as you are not incurring any overdraft fees or withdrawing money from ATMs that charge high fees, debit cards can be a simple way to make purchases.
3. Cash vs Financing or Loans
It can sometimes be better to pay for a major purchase, like a car or a home, with a loan rather than cash if the interest rate is lower than what you could likely earn by investing that money. However, you’ll also want to keep in mind that there is risk involved in investing in the stock market, so there is always a chance that you could lose money.
Recommended: Leasing vs. buying a car: What’s right for you?
The Takeaway
Even as we move towards a more cashless society, it can be important to keep cash in your wallet and use it for certain everyday expenses. Paying in cash can help you garner discounts at local businesses, stick to your budget, avoid paying overdraft and interest fees, protect against identity theft and keep advertisers from targeting you.
There are times, however, when it can make more sense to pay with credit rather than cash. These can include when you’re making business purchases and buying electronics, looking to build credit or closely tracking your spending.
Learn More:
This article
originally appeared on SoFi.com and was
syndicated by MediaFeed.org.
SoFi Money
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC . Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
website .
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
More from MediaFeed:
How often can you refinance your home?
Other than possible lender-imposed waiting periods after a mortgage loan closes, you can refi as many times as your heart desires. But you’ll want to crunch numbers and think about more than interest rates.
Homeowners choose to refinance for a number of reasons: to lower monthly payments, take advantage of lower interest rates, get better terms, pay the loan off more quickly, or eliminate private mortgage insurance.
Refinancing involves paying off the current mortgage with a second loan that has (hopefully) better terms. Borrowers don’t have to stay with the same lender—it’s possible to shop around for the best deals, and lenders will compete for that business.
Mortgage rates seem to be constantly in flux, moving mostly in parallel with the federal interest rate. Both were on a downward trend throughout 2020, and mortgage rates rang in the new year at 2.67% for a 30-year fixed loan and 2.17% for a 15-year fixed loan.
Rates that low could mean the chance for homeowners to save significant money. But should a killer interest rate automatically trigger a refinance? Here are some things to consider before taking the plunge.
Related: Home equity
loans vs personal loans for home improvement
Eugene Zvonkov / istockphoto
Because a homeowner who refinances is essentially taking out a new loan, the cost of acquiring the new loan must be compared with potential savings. It could take years to recoup the cost of refinancing.
As with the initial mortgage loan, a refinance requires a number of steps, including credit checks, underwriting, and possibly an appraisal.
Typically, however, many homeowners start with an online search for the rates they qualify for. (A low average mortgage rate doesn’t necessarily translate to an individual offer—creditworthiness, debt-to-income ratio, income, and other factors similar to what’s required for an initial mortgage will matter.)
The secret sauce that makes up a mortgage refinance rate might seem like a mystery right up there with how car sellers price their inventory, but there are some common factors that can affect your offer:
Gerasimov174 / istockphoto
As a general rule, higher credit scores translate to lower interest rates. A number of financial institutions will give account holders access to their credit scores for free, and a number of independent sites offer a free peek, too.
DepositPhotos.com
Is the loan a 30-year fixed? A 15-year? Variable rate? The selected loan repayment terms are likely to affect the interest rate.
Depositphotos
A refinance doesn’t typically require cash upfront, as a first-time mortgage usually does, but any cash that can be put toward the value of a loan can help reduce payments.
FabioBalbi / istockphoto
If a home loan is extra large (or extra small), interest rates could be higher. But generally speaking, the less the mortgage amount is compared with the value of the home, the lower the interest rates may be.
DepositPhotos.com
Some refinance offers come with the option to take “points” in exchange for a lower interest rate. In simplest terms, points are discounts in the form of a fee that’s paid upfront in exchange for a lower interest rate.
Where the property is physically located matters not only in its value but in the interest rate you might receive.
DepositPhotos.com
As with first-time home loans, consumers have a number of refinance mortgage options available to them. The two most common types involve either changing the terms of the original loan or taking out cash based on the home’s equity.
A rate-and-term refinance changes the interest rate, repayment term, or sometimes both at once. Homeowners might seek out this type of refinance loan when there’s a drop in interest rates, and it could save them money for both the short term and the life of the loan.
A cash-out refinance can also change the terms or interest rate, but it includes cash back to the homeowner based on the home’s equity.
Within those two basic types of refinance options, conventional mortgages from traditional lenders are the most common. But refinancing can also happen through a number of government programs.
Some, like USDA-backed loans, require the initial mortgage to be a part of the program as well, but others, such as the VA, have a VA-to-VA refinance loan called an interest rate reduction refinance loan and a non-VA loan to a VA-backed refinance, so it’s important to shop around to find the best option.
CatLane/istockphoto
If a home purchase comes with immediate equity—it was purchased as a foreclosure or short sale, for example—the temptation to cash out immediately with a refinance may be strong.
The same could be true if interest rates fall dramatically soon after the ink is dry on a mortgage. Especially for conventional loans that are backed by Fannie Mae or Freddie Mac, it may be possible to refinance right away. Others may require a waiting period.
According to credit-reporting company Experian, for example, there can be a six-month waiting period for a cash-out refinance. Or refinancing via government programs like the FHA streamline refinance or VA’s interest rate reduction refinance loan can require waiting periods of 210 days.
Lenders can require a waiting period (also called a “seasoning period”) until they refinance their own loans for a number of reasons, including insurance that the original loan is in good standing.
For a cash-out refinance, some lenders may also require that the home has at least 20% equity.
Wavebreakmedia
As with other things in life, just because you can (refi) doesn’t necessarily mean you should. Before you jump on the refinance bandwagon, ask yourself these questions.
-Oxford-/istockphoto
The endgame of a mortgage refinance can help determine whether now is the right time. If a lower monthly payment is the goal, it can be wise to play around with a refinance calculator to see just how much a lower interest rate will help.
For years, it has been a general rule that a refinance should lower the interest rate by at least 2 percentage points to be worth it. Some lenders believe 1 percentage point is still beneficial (each percentage point amounts to roughly $100 a month in payment reduction), but anything less than that and the savings could be eaten up by closing costs.
Ta Nu / istockphoto
It’s important to remember that a lower monthly payment—even if it’s significantly less—doesn’t necessarily equal savings in the long run.
If a mortgage with 20 years remaining is refinanced to lower the monthly payment, for example, the most affordable option could be a 30-year mortgage. But is the lower monthly payment worth it if it will be around for 10 additional years?
topseller/shutterstock
One of the biggest differences between a first-time mortgage and a refinance is the amount it costs to close the loan. Many times, closing costs for a refinance can be rolled into the loan, requiring no cash at the outset.
Closing costs typically come in at 2% to 5% of the loan amount, and although they can be rolled into the loan and paid off over time, that could mean the new monthly payment isn’t as low as planned.
One way to make sure the investment is worth the cost is to ask the lender for a break-even period.
Learn More:
This article
originally appeared on SoFi.comand was
syndicated by MediaFeed.org.
SoFi Loan Products
SoFi loans are originated by SoFi Lending Corp (dba SoFi), a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license # 6054612; NMLS # 1121636 . For additional product-specific legal and licensing information, see SoFi.com/legal.
SoFi Home Loans
Terms, conditions, and state restrictions apply. SoFi Home Loans are not available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
venuestock/istockphoto
Featured Image Credit: DjelicS/ iStock.
