The benefits and drawbacks of cash versus credit.
Last year, Canadian debt levels reached another record high, with the average household having more than $1.65 in debt for every dollar of annual disposable income.1 Most of that is mortgage debt, but consumer credit (which includes credit cards) makes up about 30% of our debt.
Credit cards aren’t always bad, but there’s a time to use them and a time to use cash.
The right way to use plastic
First of all, some of us don’t like to carry a lot of cash around. So the choice isn’t between credit and cash -- it’s between credit and debit. Debit might seem like the smart choice, because you won’t pay interest on your purchases. But most banks charge you a convenience fee every time you use your debit card,2 while credit card companies don’t.
Some people use their credit card for every purchase, from groceries to gas to lunch and coffee. That can be fine, as long as you review your credit card statement as soon as you get it, make sure everything you bought is accounted for in your monthly budget, and pay your bill in full right away. If you have a no-fee credit card, using it this way won’t cost you anything.
When to stick with cash
On the other hand, if you’re using your credit card to buy things that aren’t within your budget, and you know you won’t be able to pay off your credit card bill when you get it, you could get a financial shock. Credit card interest rates can be around 20% a month, so that $200 pair of shoes is costing you more than you think.
If you’re faced with an expense that doesn’t fit into your budget, I suggest dipping into your savings, putting off your purchase or, in an emergency, arranging for a low-interest line of credit. These are all better choices than relying on your credit card and getting into serious debt.
Are digital payment options like Apple Pay any different than cash or credit? In terms of the impact on your budget, not really. The money you’re paying with comes from either your bank account or goes onto your credit card, so you’re making the same choice.
Still, it’s hard to beat the convenience of just pulling out your phone -- something you likely have on you all the time -- and scanning it to pay for your purchase.
Give us a call today to discuss managing your debt while staying focused on your financial goals.
1 National Balance Sheet and Financial Flow Accounts, Fourth Quarter 2015
2 Financial Consumer Agency of Canada FAQs