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:
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 –
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.