The benefits discussed here are considered in the absence of annual fees for credit cards. Not all cards have annual fees, but the cards that do have annual fees will have to be evaluated and considered differently in terms of net benefit than regular cards. Even with annual fees, one of the most readily observable benefits of using a credit card over cash, checks, and debit cards is saving money through rewards.
There are different kinds of rewards, and each bank applies a different structure to their rewards. Some cards track rewards by “points” earned per dollar spent, others track rewards as a percentage of eligible purchases. Sometimes the rewards are only available as cash back or statement credit, sometimes they are available as airline “miles”, redeemable for gift cards, and other things. In most cases, the points you earn are equivalent to the percentage of cash back the points are worth when redeemed. 2 reward points per dollar spent is the same (in most cases) as 2% cash back on your purchase.
Depending on your lifestyle, spending habits, and goals, the kind of reward structure that is best for you will differ from the reward structure that is best for someone else. But regardless of which reward structure you choose, you will just about always benefit more from using a rewards credit card than any other form of payment. To illustrate that point, let’s look at a few scenarios.
If you had the choice to purchase a loaf of bread from the grocery store for $3 using cash, or purchase the exact same loaf of bread for $2.94 using cash, any rational individual would choose to purchase the cheaper loaf, assuming the two loaves differed in no way beyond their price. These savings are sometimes available using coupons, but this is also the result of using a credit card that offers 2% cash back on your purchase. You can use that cash reward to reduce the price you pay for items, essentially reducing the price of every purchase. Some cards have 1%, 2%, 3%, or more depending on the card and the category of your purchase.
Now $0.06 might not seem like an amount worth getting a card for, but imagine saving that 2% on every single purchase? Pay your $400 car registration with a credit card and get $8 back. Spend $300 a month on groceries on your credit card, get $6 a month back. This is on every single purchase. How much money do you spend in a year? How would you like to get 2%, or more, of the cash you’ve spent returned to you, just for using a credit card?
Now there are drawbacks to using a credit card for every purchase. There are two major categories that come to mind. Gas stations and online bill payments. These transactions can sometimes cost you more if you use a credit card, but only under certain circumstances.
I once had a bill that I could only choose to pay by one of two methods: I could send a check through the mail or pay online using a card. I could use a debit card or a credit card, but either choice included a “convenience fee” for using a card. I have always chosen to pay online using cards over mailing checks just for the peace-of-mind and extra security that comes with instant card transactions, rather than risk that check getting lost, delayed, or falling into the wrong hands. If this peace of mind is not worth the additional fee in your opinion, then this is one transaction that would cost you more if you used a credit card.
The other scenario involves gas station purchases. Whether it be snacks or gasoline, some gas stations either refuse to accept a credit card as payment or will charge you a fee for using a credit card, often $0.35 in my area. These gas stations usually charge this same fee for using a debit card as well, preferring that you use cash to pay for your snacks or fuel. These gas stations are often desirable, at least initially, because of the lower price per gallon on fuel, which is what draws in potential customers. Depending on the price of fuel, and the quantity you are buying, it can be cheaper for you to pay a fee to use your card or use your card to purchase more expensive gas elsewhere. The same is true for paying bills online and spending more for the convenience fee, depending on how much that fee is. I’ll show how that is possible
Scenario 1: Gas is $3.95 a gallon at a gas station on Corner A. Corner B has a gas station selling gas for $3.90 a gallon, but you must either use cash, or pay a $0.35 fee for using your credit card. You go to the station with the cheaper fuel and use your card. You buy 12 gallons. If you had used cash, you would have paid $3.90 a gallon, for a 12-gallon total of $46.80. Because you used a credit card, you paid a fee of $.035, so your credit card purchase cost you $47.15. BUT you get 2% cash back on fuel (a lot of cards offer up to 5% cash back on fuel, depending on the card you choose), so after you spend $47.15, you get $0.94 back. So, you get your fee back, and then some, just for using a credit card. The net benefit of using your credit card to pay more for gas means it was cheaper than spending your cash.
Scenario 2: Same gas stations, one selling gas for $3.95 a gallon and the other selling gas for $3.90 a gallon. This time, the cheaper station charges a fee for using a debit card but does not accept credit cards at all. Again, if you bought your gas with cash at the cheaper station, you would pay $46.80 for your 12 gallons of gas. Since they won’t take a credit card, you buy gas at the more expensive station for $3.95 a gallon. Now you’ve spent $47.40 since you bought more expensive gasoline. Since you get 2% cash back, you get $0.95 back from spending $47.40, so now your more expensive gas purchased with a credit card only cost you $46.45. It cost you less to buy more expensive gas with your credit card than cheaper gas with cash.
Obviously, math is involved here, and the best approach varies based on your situation. If you’re only buying small quantities of gasoline, a few gallons at a time, those $0.35 fees for using a card will have a larger impact on your total cost. One large fill-up will cost you less in fees than 5 smaller fill-ups that total the same number of gallons. Let’s not forget that at the end of the day, maybe it’s not worth your time to do the math to figure out how to save $0.05 on a $48 purchase. I get it. This is only to illustrate how, in one transaction, the net benefit of using a credit card can exceed the net benefit of using other payment methods, even if it seems like it’s cheaper to pay with cash.
Since the amount that you get in rewards varies from card to card, you can end up benefiting and saving money on purchases with even larger price differences than the example I gave. If you get 3% or 5% cash back on gas, you can still save money by buying gas that’s more expensive by more than the $0.05 difference I used in my example. The difference can grow to 10 cents per gallon, or more, and you can still end up better off buying the more expensive gas with a credit card. (At the time of writing this, there are several credit cards available with no annual fee that offer up to 5% in cash back or rewards points on different categories like gas stations, restaurants, etc. Your spending habits will dictate which card is best for you).
Just keep in mind that every purchase that you make with cash results in no cash back or point rewards (outside of merchant reward programs that offer you reward points regardless of how you pay, like a CVS card or similar, or small businesses that offer discounts for paying in cash). While these small amounts used in my example don’t sound significant, just imagine using a credit card for every purchase for an entire year. Think of every single dollar you spend in a year, and then imagine you had $0.02 sent back to you per dollar. You can also save up your rewards and redeem them all at once. If you spent $10,000 a year on food, gas, beverages, movie tickets, clothes, a schoolbook for your child, a Netflix bill, whatever, you would have earned $200 in rewards if you used your credit card with 2% cash back. If you spend $10,000 a year in cash/debit card transactions/checks, you’re missing out on a couple hundred extra dollars you could use to offset the costs of life.
Hopefully this all makes sense. If you have questions or comments to add, please share them below.
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