| April 1, 2016

Research of the Week: Cash or Credit for Small Purchases?

CreditCards.com concludes cash is still king, but the crown is slipping.

 
Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

CreditCards.com polled over 600 U.S. credit card holders to see how they prefer to pay for small purchases – i.e. purchases of less than $5. They conducted the same survey two years ago and the results show that while cash is still king for small daily expenditures that preference for paper is losing ground rapidly.

The big result

According to the survey, 2 out of every 5 consumers will break out a card to pay for a small purchase of less than $5.

  • 11% use a credit card
  • 27% use a debit card
  • 58% use cash

While cash may still be what the majority of people use, when the exact same survey was conducted two years ago cash held 65% of the preference. So in just 24 months, cash lost 7% of its small purchase market share.

The fascinating details

The survey went on to break down those preferences by demographics. Not surprisingly, age is the single greatest predictor of how you pay for small purchases. Younger consumers have a much stronger preference for plastic, and that’s not just talking about debit cards. For Millennials (18-39), 64% use a debit or credit card for small purchases. For those ages 65 and up however, only 19% use plastic.

There are some other interesting distinctions included as well:

  • College grads are more likely to use plastic. 28% of college grads use credit, 16% use debit; for those who didn’t attend college only 21% use debit and only 7% use credit
  • Parents prefer cards, while childless consumers carry cash. Parent use debit or credit almost half the time (47%) while nonparents only use plastic 35% of the time
  • Lower-income workers prefer cash. If you make less than $50,000 you’re 63% more likely to pull out cash, while those with incomes of $75,000 or greater usually prefer plastic.
  • Unemployed workers also prefer cash. Additionally, about 69% of the unemployed workers surveyed use cash, compared with 52% of employed workers

What you can do

From a financial perspective, using a debit card to pay for a small purchase is effectively like using cash. As long as you have sufficient funds in your account, you shouldn’t incur any extra fees or charges by using debit card plastic versus using cash money.

The potential for increased cost really only comes into play when you talk about using credit cards for small purchases. In this case, you may be increasing the cost of these small purchases with interest charges unless you pay off your balance in-full by the due date for each billing cycle.

“Using credit cards for incidentals and small purchases is fine as long as you’re managing your debt effectively,” explains Gary Herman. “You must pay off these balances in full every month in order to avoid the application of finance charges that increase cost. If you can do that every month, then you can enjoy the benefits of using plastic even for small purchases without increasing your risk for debt problems.”

Those benefits include things like credit card rewards. Many gas cards and even major credit cards with rewards programs for gas and groceries give you incentives like percentage cash back for your purchases. So by putting these small purchases on plastic, you can earn valuable rewards. The tradeoff is that if the balance is not paid off in full at the end of the billing cycle, interest charges will be assessed on the remaining balance.

With that in mind, you need to set up your budget so you can pay off those balances in-full every month so you can reap the rewards without incurring the added cost. If you get into trouble or you need help creating an effective budget that keeps debt in check, we can help. Call Consolidated Credit today at or complete an online application to request a free and confidential debt and budget analysis from a certified credit counselor.

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