Cash Is Still King for Small Purchases

NEW YORK (MainStreet) — Approximately two in three credit cardholders will opt to use cash often for purchases of less than five dollars, according to a new CreditCards.com report.

The tendency to use cash increases sharply with age. Almost eight in ten credit cardholders age 50 and older prefer to use cash for small transactions. For cardholders between ages 18 and 49, it's virtually a dead heat between cash with 52% who prefer it and credit/debit cards with 46% who use it.

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The youngest cardholders, or those who are 18- to 29-year-olds, are the only age group to prefer plastic. Millennials with credit cards prefer debit over credit by a ratio of nearly three to one. Among all cardholders, debit outpaces credit by a two to one margin.

"The question is whether millennials will eventually embrace credit as they age and their financial situations change," said Matt Schulz, a senior industry analyst for CreditCards.com. "I believe they will due in a large part to the more lucrative rewards programs and better consumer protections from credit cards."

Using cash to pay for daily purchases has its rewards, because it can be a quick transaction and helps some consumers budget better, he said.

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Credit cards are a much better option than debit cards because if fraud occurs and you need access to the money, it can take banks an average of a week to refund the funds, Schulz said.

For some consumers, there is less middle ground and some choose to pay for everything with a credit card to build up rewards while others refuse to use credit cards for any purchases to control their spending, he said.

"It can be an all or nothing," Schulz said. "It was interesting to see how much of a divide there was generationally."

As more retailers accept mobile payments and the Millennial generation becomes older and more financially stable and secure in their jobs, the number of people who will use cash will likely decrease, he said.

"It would make sense more of them might gravitate toward using credit cards to get things like rewards," Schulz said. "It will be interesting to see where that ends up."

The survey also found that cash is the preferred payment method for almost eight in ten rural cardholders versus just 62% of city dwellers and suburbanites. Cardholders without children under 18 are 10 percentage points more likely to use cash than those with young children. More information is available here.

Consumers who prefer to use cash frequently for purchases are one step ahead, said Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. People who live on a cash basis never have to worry about payment due dates, paying late fees or interest or being overdrawn.

"They purchase what they want until the money runs out and end up spending approximately 20% less than they did when they charged their purchases," she said.

The focus on accumulating points or airline miles can result in some shoppers losing track of how much they are spending each month, which can backfire when they are unable to pay off the balance.

"Although at first glance, charging small amounts makes little sense, people who are interested in accumulating reward points will often charge even the smallest of purchases," Cunningham said. "This is fine if they pay their credit card bill in full each month."

Shoppers who are not that disciplined often find that using a debit card is a great alternative since when "the money's gone, the spending stops," she said. Consumers who do not faithfully record each debit card transaction can be at risk of overdrawing their account and wind up paying additional fees.

People tend to hold on to large bills longer than small bills, said Kevin Gallegos, vice president of Phoenix operations for Freedom Financial Network, the San Mateo., Calif.-based consumer credit and financial services company.

"So when consumers are using cash, they should try setting out with a $50 bill instead of a wad of ones, fives and tens," he said.

Paying with cash or a debit card can sometimes mean getting a discount.

"If you have saved up money for a new appliance or car, for instance, you might be able to get a better deal if paying all or part in cash or by debit card," Gallegos said.

One of the greatest advantages of using a credit card is the ability to build credit history and scores.

"Responsible use of credit shows that you can manage and repay debt," he said. "You can build and improve credit scores by making small purchases with a credit card and repaying the full balance on time every month. While cash and debit cards do not help build a credit history, paying all bills on time – even in cash – does help to build a positive credit profile."

--Written by Ellen Chang for MainStreet

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