Jan 4 – The age old question – should we pay in cash or with credit?

January 4, 2024

For the first time in 70 years, there’s a new monarch on the back of our nickels, dimes, quarters, loonies and toonies.

And that change recalls an age-old question – is it better to use cash or credit, generally? Save with SPP took a look around for some answers.

According to figures from the Bank of Canada, this country has seen a gradual move away from cash spending. Cash accounted for 54 per cent of transactions as recently as 2009, the bank reports, but by 2013 that figure had dropped to 44 per cent. It slid to just 33 per cent in 2017.

Interestingly, the value of cash transactions also declined in the same period – in 2009, the bank notes, 23 per “of the total value of goods and services purchased” was in cash. By 2017, this number had fallen to 15 per cent. And we’ll recall cash use fell even more during the pandemic.

Is cash dead?

“So, does this mean that Canadians are giving up on cash? The short answer is no. Canadians still rate cash as easy to use, low in cost, secure and nearly universally accepted, and it’s the preferred payment option for small-value purchases like a cup of coffee or a muffin,” the bank notes.

“In fact, the lower the value, the more likely it is the buyer will choose cash,” the article adds.

An article in MoneySense from a while back highlights how using cash may make us more conscious of our spending than using credit or debit cards.

“Is it harder to part with cash than to slide your credit card through the machine? Would a $200 pair of shoes give you pause to think if you paid for them in cash more so than if charged your credit card? You betcha,” the article notes.

The article cites two U.S. studies on the topic. A Journal of Experimental Psychology article reports on a study, MoneySense notes, that concluded “shopping with cash discourages spending, while using credit or gift cards actually encourages it.” Why?

The authors of the study, reports MoneySense, found that “using a less transparent form of payment such as a credit card or a gift card lowers the vividness with which one feels that one is parting with real money, thereby encouraging spending.”

Interesting – spending with physical cash is seen as more “conscious” spending, then.

A Forbes article also weighs in on the topic.

The article makes the point that your own financial habits should dictate when you use cash, or not.

“If you are carrying a large credit balance or struggling to stay on top of payments, sticking to cash whenever possible may help you pay down debt,” the article notes.

“Many people use credit cards regularly and rarely carry a balance. If you stay on top of your payments and pay your card in full, a credit card is probably a great option for you,” Forbes reports.

Credit cards, the article notes, “provide a unique level of security against fraud and loss. In Canada, if your card is issued by a bank and unauthorized purchases are made on your card, the maximum amount you can be responsible for is $50 (unless you demonstrated gross negligence in safeguarding your card, its information and other info like your PIN or password).”

Similar protections apply to debt cards, the article reports.

Cards feature things like purchase protection and insurance, anti-fraud detection, a grace period and “rewards, cash back and bonuses” that you just don’t get with cash, the article adds.

“While creditors are hoping you will carry a balance, rewards points can be an excellent way to earn while you shop, especially if you don’t carry a balance. Some credit cards offer three to six per cent back on selected categories. Other cards may offer one per cent or more back on all purchases,” the article adds.

However, reports Forbes, cash has its advantages as well, particularly if you have balances on credit cards or lines of credit. “Debt is a major problem for Canadians. As of December 2022, the average debt in Canada was $21,183 (excluding mortgage debt), according to a report from Equifax,” the article notes.

“By paying for purchases with cash, you avoid interest charges on those new purchases,” as well as even higher interest on a higher balance, the magazine adds.

The Motley Fool lists off a few more advantages of cash. Cash is “universally accepted,” and by using cash you can avoid transaction fees common with credit and debit cards.

It is easier to budget using cash, the article continues. “Paying only in cash means that once the cash is gone, that’s it – you’re done spending,” The Motley Fool tells us. “This strict limitation can help you curb overspending, aligning your purchases more closely with your budget.”

A disadvantage of cash is that if it gets lost or stolen, you are out of luck – there is no theft protection or insurance built into it.

The Motley Fool article also makes the point that while you can earn cash back, rewards points and other perks with credit cards, it is easy to abuse them, and “spend more than you can reasonably afford.” And if you don’t pay the full credit card balance each month, you are looking at interest rates of 20 to 30 per cent, the article concludes.

Noted financier Mark Cuban once observed that when you pay with cash, you can often negotiate a better price. If something costs $200, and you say you only have $175 cash, maybe you will get a deal, he has said.

It sounds, from reading all this, like there is no single answer on which is best, cash or credit. The experts seem to be saying it depends on your personal relationship with money. If you pay all your bills on time, especially credit cards and lines of credit, then maybe credit use is OK for you. If not, cash is a way to keep your debt from getting even bigger.

We already know that the Saskatchewan Pension Plan is a great do-it-yourself retirement savings program for Canadians. Any Canuck with available registered retirement savings plan room can open an account, and can let SPP’s experts invest their savings in a professionally managed, low-cost fund. But what’s new is that now, any Canadian SPP member has the choice, at retirement, between a lifetime annuity or the flexible Variable Benefit option.

Check out SPP today!

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Bank of Canada, Forbes, MoneySense, Motley Fool

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