Credit Vs Cash Spending | H&R Block
Women and finances
Why women should manage their own finances
March 8, 2016
Investment in Provident Funds
Investment in Provident Funds
March 14, 2016
Show all
Credit vs Cash Spending

 

A dollar today is worth more than a dollar tomorrow. This is a very famous saying and this is going to be the major supporting argument in this discussion about whether paying by credit card is better than paying in cash.

Some experts usually advise us about not using credit cards with a lot of logical persuasive arguments. They have a good reason to do so because many people abuse credit card and end up in unmanageable debt. However using it responsibly could save a lot of money for you.

The fact that any purchase you make is not deducting any money from your bank account and you have to pay that money after a certain period of time without any interest basically makes credit card as a loan of 0% interest for a certain period of time. During this time, the money that didn’t go out of your bank account is growing as it is earning interest for you.

Let’s take an example. Say the credit card’s billing cycle is from 1st of the month to the end of the month and you have to pay the bill by 15th of the next month. Your bank gives you 4% annual interest on your savings account. You purchase something worth Rs. 1000 on 1st of the month. If you pay for this purchase in cash or use debit card, the money you hold is deducted by Rs. 1000 instantly. Instead if you use credit card, you still have those Rs. 1000 in your bank. Assuming you are going to pay the credit card bill on first of the next month, it is going to earn you 1000*4%/12 i.e. Rs. 3.33 in that month. It doesn’t seem a lot but, remember that Rs. 3.33 is still in the bank account and is going to keep earning interest in future. If you were to invest this money in a fixed deposit for 1 year with interest rate of say 8%, it is going to be almost Rs. 3.6. Now apply this logic to every rupee you spend for buying groceries, clothes, fuel, dining out etc. and you could save a great amount of money.

On an average say you spend Rs. 1,00,000 per year on these items and by using credit card, you get to keep the money in bank account for average of extra 15 days, you save Rs. 167 per year just through the savings account’s interest.

Apart from this, credit cards give other benefits as well which you can’t get if you use cash payment. Some of them are:

  1. Reward points: Many cards give you reward points per certain amount spent using them. These points come handy after a while when they accumulate and you can redeem those for things like movie tickets, online purchases, online travel tickets etc. You don’t get this advantage if you spend using cash.
  2. Cash back: Credit card companies keep coming up with cash back offers for their customers which is kind of an extra discount on what you are spending at certain outlet. If you are planning to spend money there and you have a card which offers you a cash back at that outlet, it makes sense to use it.
  3. Safety & ease: Purchases like mobile phones, TV, fridge, furniture etc. need a lot of money. Carrying a lot of cash for buying such items is very difficult and unsafe. Instead a card payment reduces this hassle.
  4. No need to carry change: How many times has it happened that you bought something worth Rs. 517 and you come back from the store with 3 small Rs. 1 chocolates which you didn’t even need or, you had to break your Rs. 10 note because you were not carrying change of Rs. 1-5? All this hassle is avoided if you pay by a card. You also save those extra calories from those chocolates.

Although the points above fall under the category of cash v/s card discussion, credit cards get an edge due to their ability to keep your money in the bank for a longer period of time.

Of course there are some things you need to be cautious about when using a credit card like –

  • You have to pay the credit card bill in time else you will end up paying a very high interest on the due amount. The credit card interest rates are usually very high.
  • Spend only as much as you can afford. Even though purchases are not reducing money from your bank account at the moment, but you still have to pay it some day. So limit your spending till the point you can afford.
  • Use it only till the credit limit offered by the card without any extra interest. Some cards offer extra credit limit by charging special fees or interest. These are very high amounts compared to the savings you are going to make by using credit card. So avoid doing this.

To conclude, if you are a responsible credit card user then, it makes sense to use it to your advantage. Let the money sit in your bank account as much as possible instead of withdrawing it for cash payments and see it grow through the power of compounding.

Ankita Mathur
Ankita Mathur
Ankita is a CA by qualification and a tax advisor at H&R Block. She works as a senior advisor in the GST Centre of Excellence at H&R Block. She also specializes in matters of India & US individual taxes. Her job involves helping people understand their taxes in the most simplified ways and giving them sound advise on saving taxes.

2 Comments

  1. Anurag Mathur says:

    Very logical article. People are afraid of using card, as they are unable to control them selves. This is a very good instrument, if used judiciously.

  2. Balaji says:

    I have 3 credit cards with payments around 1.9 Lakh per year per card.Will IT department scrutinize my card?
    Should i pay tax though i use them for many of my friends?

Leave a Reply

Your email address will not be published. Required fields are marked *