Market Overview

Why We Prefer Using Cash Over Credit For Small Purchases

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Do you use your credit card for most purchases? Are there times you prefer paying with your debit card? Perhaps you still use those funny green paper rectangles with numbers on them?

Cash hasn't been forgotten, especially for smaller payments. A study by CreditCards.com shows that 45 percent of consumers who have rewards credit cards still prefer to use cash for payments below $10. Even debit cards are more popular than credit cards on small payments.

This finding is consistent with previous data from the Federal Reserve's Diary of Consumer Payment Choice (DCPC). In 2016, the DCPC found that 55 percent of all payments of $9.99 or less used cash, while cash prevailed for 35 percent of purchases between $10 and $24.99 but only 19 percent of purchases from $25 to $49.99. The CreditCards.com study agrees, showing that $25 is the median tipping point for using credit for purchases.

Why wouldn't you use a credit card for all purchases when you get rewards from your credit card company? Lack of speed and convenience are the main reasons, according to the study. Now that chip readers are prevalent, the simple swipe has been replaced by chip card insertions that can take fifteen seconds or longer to process.

Aversion to debt plays a role. One-quarter of consumers cited concern about excessive credit card debt — the second most common reason. That concern is well founded. ValuePenguin estimates that the average credit card debt for households that carry balances is $9,333. According to the Federal Reserve, total revolving debt — most of which is credit card debt — exceeds $1.03 trillion.

Millennials show an unusual split in their cash usage. Approximately 36 percent of the older segment of the generation (ages 28-37), perhaps remembering the Great Recession, prefers to use cash for small purchases. The younger segment (ages 18–27) prefers credit, with 41 percent opting for credit and only 24 percent preferring cash.

While bigger purchases are usually put on credit, the psychology of smaller purchases may push people toward cash. Smaller purchases seem to have trivial credit rewards, for example, a 2 percent cash-back card would yield a paltry $0.02 on a $1.00 purchase — but every little bit adds up.

How should you pay for smaller purchases? There is no single right answer.

If you want to maximize use of your rewards card, you should always pay with credit – but only if you don't charge more than you can afford to pay at the end of the month.

Credit cards can be an effective way to manage money, improve credit, earn points, and travel with perks if used the right way. Benzinga's personal finance staff provides tips on using credit cards effectively.

Related Links:

Study Shows The Richest Households Have The Second-Highest Credit Card Debt

10 Money FAQs You Should Be Able To Answer

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: contributor contributors credit cardsNews Personal Finance

 

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