Credit cards are a very convenient method of paying for goods and services. It is argued that, as much as many consumers would like to pay in cash, millions wouldn't be able to cover their household bills. The worry has always been that cards are a major source of high APR credit card debt. According to CreditAction.org, the average rate of APR charged on credit card balances is 17.42%.
Why Use a Credit Card?
- Household bills. Whilst it would be nice to pay in cash, the cost of living can mean that no money is left at month end to cover essential household bills. It is estimated by uSwitch.com that in excess of a million people are using credit card cash advances to cover essential loan and mortgage payments.
- Convenience. Whilst opting to pay in cash for the week's groceries is no hardship, it is considerably more convenient to pay for expensive items with a credit card.
- Credit card rewards. Choosing to pay in cash helps prevent personal debt, but it doesn't earn a consumer credit card rewards. It is possible to earn 1% cash back or even credit card air miles.
- Internet transactions. It is not possible to pay in cash for an Internet purchase.
- Foreign travel. Carrying cash abroad can be dangerous. Many hotels will also insist upon the provision of a credit card to cover additional charges or accidental damage.
- S75 protection. A consumer is entitled to a refund on a credit card purchase of between £100 and £30,000 under S75 Consumer Protection Act 1974 should a major issue arise.
- Chargebacks in the event of fraud. Should a consumer be the victim of credit card fraud, it is possible to initiate a chargeback and get a full refund from the merchant.
Is it Better to Pay in Cash?
- Avoid credit card debt. Millions of consumers buy items on their credit card, but only make the minimum monthly repayment. This only serves to create credit card debt as people are only paying back interest, not capital.
- High APR personal debt. Whilst a high APR is charged on purchases of goods and services, it is even higher on credit card cash advances. uSwitch.com estimates that the average APR for cash withdrawals is currently 29.97%.
- Compulsive spenders. Choosing to pay in cash allows a consumer to see how much they are spending. Unlimited credit can make it difficult for consumers to grasp how much credit card debt they have created.
- High credit limits. The offer of a high credit limit may seem like a blessing, but it is a major source of credit card debt. The more credit provided, the less easy it is for a consumer to pay-off. Opting to pay in cash for purchases means that this problem need never arise.
- Bad credit. The more credit card debt a consumer has built, the more likely it is that a consumer will miss or make late payments. A bad credit rating will be registered at all credit reference agencies, making other sources of borrowing more expensive.
Consumers with a bad credit rating may find that existing credit card arrangements provide the cheapest means of borrowing money to help with essential household bills. However, a credit card should never be seen as a long term borrowing method due to the high APR. Consumers struggling with personal debt should avoid using credit cards for the purchase of non-essential goods and services.
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