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Considering the fact that a lot of Americans are currently in debt, it is apparent that we need to change lot about our spending choices. According to CNN.com, an estimate of 1 in 3 American adults (at least those with a credit history), is far behind when it comes to debt payments. In fact, 77 million of them have credit accounts that are already “in collections.”
It had long been debated if using cash will keep us from incurring debt. But what is the real cost of paying through cash?
The real cost of paying through cash
An article from CNBC.com discussed in 2013 that using cash as a purchasing tool cost Americans $200 billion a year. Although it is true that payments done through cards (debit and credit), online and through mobile phones have gone up, using cash is still the reality for some people.
The article cited a couple of reasons why people choose to use cash.
- Lack of checking account. For some people, using cash is not really an option but more of borne out of having no choice about it. Their lack of bank accounts or checking accounts make them unable to enjoy credit or debit cards.
- Cash is accepted anywhere. Others choose to use cash because they know that cash is accepted anywhere. They do not have to worry about looking for an ATM just because their card is a purchasing tool that is not allowed in the store.
- Need to control spending. Some consumers believe that cash will help them control their spending urges. Not only that, they believe that using cash is a lot cheaper compared to credit. After all, you do not have to be burdened with annual fees, penalty charges, interest rates, etc.
But despite all of these factors, the experts believe that using cash also have costs that are beyond the actual amount that you dispense when use it as a purchasing tool in a store. Even if you use cash, you still have to pay for fees when you encash your check or you withdraw from an ATM that is not in your bank’s network. Even if you access your salary from a payroll card, that also entails costs.
The article cited that these fees add up to $200 billion each year. Of this amount, $43 billion is wasted by households. So if you are worrying about the amount that you will waste on interest rates, you might want to consider the amount that it will cost you to use cash too. The article estimated that these costs the average American household $1,739 a year.
The article cited some interesting data from a study done by Tufts University called “The Cost of Cash in the United States.” The data from the study (after a survey is done on 1,000 Americans) revealed the following:
- Those without bank accounts pay an average of $3.66 more every month - just to access their own money.
- Most consumers receive their salary in payroll cards that act like prepaid debit cards.
- Workers who get paid in cash or direct deposit have the lowest fees in accessing cash.
- Direct deposit or payroll cards are cheaper to access compared to those who receive their salaries by check. The fees of check-cashing is quite costly.
The study, as indicated in the article, believes that the low income earners who are most likely to use cash, should be given access to both cash and electronic payment methods. What we can do is to provide them with options for both that will not eat up much of their limited incomes.
Here is a video that studies why poor people choose to use only cash - and turn their backs on banks. It might shed light as to why using cash may still be beneficial.
While there is no doubt that cash is useful as a purchasing tool, it will not lead you towards financial happiness. You will always need credit at some point in your life. What you need to learn is not how to use cash all the time, but how you can learn how to manage credit properly.
Is a cashless society really in our future?
While we are certainly striving to live in a cashless society, it is apparent that using only cash is not really the smartest way to go. According to an article published on Bankrate.com, experts are doubting that cash will really go away. It is just like the emergence of checking accounts did not eliminate the need for cash, it is the same way for any electronic purchasing tool. The use for paper bills may go down but it is believed that it will never really go away.
There are benefits to using cash after all and that was what we explored previously. Let us explore why you should not solely rely on cash when making purchases. There are three important reasons why carrying cash can be dangerous.
- Danger of losing it. The first danger is in losing it. When you lose your cash, it is as good as gone. You will not be able to get it back. When you lose your credit card, you can call your card issuer and have them freeze your account. Or you can raise a fraud alert so anyone who will use your card will be asked for additional proof of identity. That means only you can use the card account. There is no protection similar to this when you are using cash. That is why you need to be very careful when you are carrying it. The chances of it being lost and never retrieved will always be there.
- Danger of having it stolen. Another danger of using cash as your sole purchasing tool is having it stolen. In the same way that there is danger in losing your cash, it can also be stolen and you will never be able to catch the culprit. Or at least, the chances of you catching them and getting your cash back is very slim. You may want to keep this in mind when you are out on an errand and carrying your week’s budget with you.
- Danger of limited supply. The last danger is having a limited supply. This actually works as both an advantage and as a disadvantage. On one end, you get to ensure that you will never go beyond your budget. When you run out of money, you have no temptation to spend - like what you will have when you use credit cards. But when you are only using cash, there is a chance of you running out of money when you need it the most. We have mentioned how cash can be a dangerous purchasing tool have in your wallet - at least, to have it in abundance. So more often than not, you will be carrying only a small amount with you. But what if you run into something unexpected and you need the extra cash? What if there is no ATM nearby that is of the same network as yours? You will have to waste money paying the fees that will give you access to your cash. If you have a credit card, you can use that and pay it off immediately once you get the bill. You can avoid interest rates if you do it that way.
What we are saying is that you should neither patronize cash or credit cards. Any of them can be an effective purchasing tool but it does not mean you have to choose between them. You can use them both so you can benefit from both. Of course, you have to learn how to be a smart credit card user first in order to take advantage fully of your card.