Cash or Credit: A Stuffing Under the Mattress Vs. A Hiding in the Closet

It took longer than usual to take up the pen today. Probably because it was imperative to check out the “Every Single Outfit Catherine Wore on the Royal Tour” feature in the Huffington Post.

Having done that, I now turn to more important matters.

Like this cash-or-credit debate taking place in the papers. Financial vigilantes are urging consumers to cut up their credit cards and throw them away. One article in SmartMoney actually sounded the shibboleth: “I’m going all cash!”

To which readers had a range of emotional responses. Two encapsulating these:

“This is simply an irritating article. I am willing to bet $1000 that the author
is lying and in fact is still using his credit cards and not wandering around
paying for everything with cash. If you’re going to write an article, at least
please be intellectually honest. Do you think we are that stupid?’

And:

“Already living this dream. In fact it is a great reality to know that you owe nothing to anyone. We do not have credit cards either, we have covered that with an emergency fund. We own a house (no mortgage) and we have paid cash for all of our vehicles (no financing). As far as I’m concerned, living within your means and being debt free is the NEW AMERICAN DREAM.”

The most compelling reason for getting rid of your credit cards is obvious: ordinary folk have to pay 14% interest on average for them. Yet banks pay less than 1% whenever they feel like borrowing from the government (yes, that includes JPMorgan Chase, Bank of America — even Goldman Sachs and Morgan Stanley, which received “bank holding company” status during the credit crisis).

Kind of annoying that the Big Banks get to play with money for almost nothing, but not us Little People, isn’t it?

Part of the bank campaign for plastic over paper has to do with all the lovely fees they get to rack up every time you swipe your card. Buy food on a flight lately? Notice they won’t take cash? Get a refund from a catalog? Notice they send you a charge card? Even highway tolls, unemployment benefits and tax returns are leaning heavily on credit cards and various electronic schemes. We’ve always known we have to pay for the things we buy. But who ever thought we’d have to pay…to pay?

When it comes to taking miniscule slices of your money billions of times over, there are many ways to skin a cat.

That said, you can be as creative as the banks, if you want to be. Remember, canceling a credit card can hurt your credit score. So pay it off. And lock it away in a safe or put it on a high shelf until the banks are forced to offer rates that make sense again. We should not have to pay 14% interest. That’s ludicrous. The average hedge fund would love to get returns of that size every year. Ordinary consumers should not be expected to offer the returns of hedge funds. Even most hedge funds can’t do it.

As for cash, I have a close friend who’s figured it out. He has calculated his weekly budget for food, entertainment, dry cleaning, et cet, and withdraws one sweaty wad of cash a week. When it’s gone, he does not withdraw again until the next week. By doing this, he spends more wisely and saves on withdrawal fees.

So, credit cards in the closet. Cash under the mattress (or in his case, on the bedside table) and you are all set. Should it be this way? No. But that’s not your fault. Don’t let the banks make you sweat. You make them sweat. Remember, they’re supposed to be working for you. Not the other way around.

3 thoughts on “Cash or Credit: A Stuffing Under the Mattress Vs. A Hiding in the Closet”

  1. Your friend who withdraws cash 1X per week seems to be missing the point. If he/she is so good at budgeting, why wouldn’t he use credit cards to pay for all his purchases each month and then pay the bill in full each time?

    Over 20 years I’ve never carried a balance over month to month. Conservatively, this has resulted in thousands of accrued interest on the spread I’ve earned from them. And if I need it, I have the credit to make a large purchase and pay over time (with a high interest rate, yes – but it’s nice to have the option)/

  2. Yes, good point. For me, traveling means that the currency-conversion charges for overseas purchases is enough to turn me off some of that. (I use a USAA debit card for foreign transactions, as they don’t levy those.) If you are using an ordinary credit card domestically, though, I would agree it’s enough to pay off each month to avoid interest. Another reader pointed out to me that letting a credit card go idle is also problematic for the credit score, which I should have covered. I try to have some monthly, automated thing attached to any card (a phone bill or the like) so that I can feign activity. It’s stupid, but necessary. Now…does anyone know how to avoid ATM fees?

    P.S. My friend does use credit cards and, like you, pays them off each month. Smart.

  3. If you want to make the banks really sweat it out, use cash for as much as possible. Banks do not get fees when you use cash. But I do understand that Credit Cards are convenient. I use them to pay the routine monthly charges like trash pickup, power, water, cable/satellite automatically. But I could (and do) use my credit unions online check writing feature.
    The banks do act like I should be privileged to put my money in their savings/checking accounts so that they can charge me and the vendors fees for each transaction (sounds more like a tax). It should be the other way. The banks should be privileged that I’m a customer who would trust them to hold and use my money.
    BTW, I now understand why my grandparents never really trusted the banks. My grandfather kept thousands of dollars in safe deposit boxes that paid no interest. The estate execs only discovered this after he died.

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