Do you use credit cards for every purchase?
If you would have asked me this a couple years ago, the answer would have been “100% yes.”
I’ve long been a big fan of using credit cards to earn rewards points and to help track my spending. As long as you pay your credit card bills on-time and in-full every month, credit card rewards can be quite valuable.
The best vacations I’ve ever had were paid for using points instead of cash.
My wife and I have taken some amazing vacations that we would have never gone on if we had to pay in cash.
We used points to fly first class to Florence for our honeymoon. We’ve used points to stay at luxury hotels in Paris, Barcelona, and Santorini that normally charge more than a thousand dollars a night.
When my wife and I were still dating, we went to New York for a wedding. We got out there two nights early, and I used points to book us a room at the Waldorf Astoria. This was back in my real life, really lost boy days when I didn’t have any spare cash for something like this.
My wife and I had a great time at the Waldorf before heading out to Long Island for the wedding.
I may have forgotten to tell my wife that in Long Island, we’d be sharing a room with two (turned out to be three) of my buddies. I didn’t have any points left for this hotel. Oops.
She was a good sport. Not even the surprise ice storm from the groom in the middle of the night bothered her. She was a keeper.
I could go on and on. The point is there was a long period of time where all of our vacations were paid for using points instead of cash.
Using points also helped me stay on budget and build my net worth.
Besides the incredible memories, the other major benefit to using points was that we could save more money every year. We could then use those savings to fuel our Later Money goals, like investing in real estate.
That meant our net worth grew in the background while we were out having these amazing experiences.
I also have long been a fan of using credit cards to help me stay on budget. With credit cards, I can quickly track my spending online during the month to see if I’m on pace for a good month.
If I notice that I’ve overspent, I can slow down my spending to get back on track.
Between the rewards points and the ability to track my spending, I still am a big fan of using credit cards for most everyday purchases.
When used responsibly, meaning paying your credit card bill in full and on-time every month, credit cards can be part of a healthy financial life.
That said, nowadays, I’ve started using cash more frequently.
I’ve started using cash more often these days.
I still use credit cards more than cash, but I’m starting to use cash more often than I used to.
There are a couple main reasons for this.
I use cash for the convenience for smaller transactions.
I now use cash regularly for smaller or quicker transactions, like going to the farmer’s market, grabbing ice cream for the kids, or paying for taxis.
Yes, I still take taxis. I work as a mesothelioma attorney in downtown Chicago near the courthouse. Taxis are plentiful and a lot of times quicker and cheaper than ride share companies.
And, there are ATM’s on just about every corner near my office in Chicago, so it’s not inconvenient to keep cash on hand.
For these types of transactions, I value the convenience of paying with cash more than the small amount of credit card points I would earn.
I also like to pay cash to help out these types of small businesses because they seem to generally prefer being paid in cash. I leave whatever change I’m owed as a tip.
Also, I’m no longer worried about precisely tracking my cash spending in my Budget After Thinking.
Instead, I simply account for a few hundred dollars of spending using cash each month. I generally know what types of things I’m spending cash on, so I don’t worry about tracking each expenditure specifically.
Besides convenience, there’s another reason I use cash more frequently now.
Besides convenience, I’ve started to use cash regularly for another reason.
It’s not that the rewards have changed very much. Or, that I no longer like tracking my spending.
It’s for a different, and somewhat disappointing, reason:
More and more service providers, retailers, and restaurants are charging fees to use credit cards. These fees can be as high as 4% of the purchase price.
These additional fees are sometimes referred to as “surcharges” or “processing fees.”
Be warned, sometimes these fees are cloaked as “discounts for cash payments.” Don’t be fooled. This is just a sneaky way to say you will be penalized for using a credit card.
Why do businesses charge processing fees?
For a little bit of context, credit card companies make money by charging businesses a “merchant fee” or “interchange free” whenever customers pay with a credit card.
Most businesses pay these merchant fees. That’s because there are plenty of incentives for businesses to accept credit cards.
For one, many customers prefer to pay with credit cards, like me. Businesses typically don’t want to lose out on these customers who prefer to pay with credit cards.
For another, businesses are well aware of the fact that people tend to spend more money when using credit cards instead of cash. Obviously, it’s good for business when people spend more.
There are certainly other incentives, as well. The point is that businesses have long paid these merchant fees in exchange for benefits provided by credit card companies.
In recent years, more and more businesses have decided to pass these fees onto customers.
Businesses, especially smaller businesses, commonly point to the past few years of surging inflation for why they need to pass these processing fees onto customers.
Have you also noticed these fees popping up seemingly everywhere these days?
As a consumer, whether we like it or not, these processing fees seem to be sticking around.
So, what can we do about it?
We can choose to use cash instead of credit, or we can choose to not spend our money at that business.
Let’s look at an example to help you make that decision for yourself.
Who really cares about a small processing fee anyways?
A processing fee of 4% may or may not sound like a lot to you.
Let’s look at an example to put some real numbers on it.
Let’s assume you’re going to buy a new TV that costs $1,000.00 (all taxes included) from a reputable store. A 4% processing fee on the purchase of a $1,000.00 TV means adding $40 to the price of that TV.
That TV now costs you $1,040.00 with the processing fee.
That’s a $40 penalty simply for using a credit card instead of cash. That’s a penalty that the next customer paying in cash doesn’t have to pay for the exact same TV.
Keep in mind this is a $40 penalty charged on just this one purchase. Consider all the other purchases you make with a credit card and what those total penalties could add up to.
Since you really shouldn’t be buying that TV unless you have the cash available to pay for it, is there any good reason to willingly pay a $40 penalty?
We’re assuming you’re shopping at a reputable store, so you shouldn’t have to worry about purchase protection.
So, that really leaves only one potential benefit to using a credit card for this purchase.
What about the points you can earn?
Let’s play that out so you can decide for yourself.
Aren’t points worth more than whatever the processing fee is?
Let’s continue our same example of purchasing the TV for $1,000.
Including the 4% fee, the TV costs $1,040.00.
Let’s assume you buy this TV using the Chase Freedom Unlimited, which is the actual card I would use if I were making this purchase.
The Chase Freedom Unlimited offers 1.5 points per dollar spent. That means this TV purchase of $1,040.00 would earn you 1,560 points (1040 x 1.5 =1,560).
Next, let’s look at my favorite website for valuing rewards points, The Points Guy. Currently, The Points Guy values each Chase Ultimate Reward point at 2.05 cents.
So, 1,560 points, valued at 2.05 cents per point, is worth $31.98 ((1,560 x 2.05)/100=31.98).
Now, we can decide if paying the 4% service fee to earn points is worth it.
In this example, by choosing to use your credit card with the $40 processing fee, you’ll earn $31.98 worth of points.
In other words, even accounting for the points you’ll earn, this transaction still costs you an extra $8.02.
Does that sound like a good deal to you?
Personally, I would rather keep the $40 in my bank account instead of earning $31.98 worth of points.
To me, this is not even a close call.
It doesn’t make a lot of sense to trade in a higher amount of cash for a lesser amount of points. Not only are you technically losing money, cash is more flexible than credit card points. You can use cash everywhere.
I don’t think it’s a stretch to say you’d be hard pressed to find anyone who would take $31.98 worth of points instead of $40 in cash.
What if the processing fee was lower?
Even if the processing fee was lower, say 3%, my decision wouldn’t change.
At a 3% fee, the TV would cost $1,030 and you would earn 1,545 points valued at $31.67.
In this scenario, it’s true that the points are worth $1.67 more than the processing fee.
I’d still rather have the cash. I value the flexibility that $30 in cash provides me more than a comparable value in points.
Admittedly, it’s a closer call when the processing fee is 3%. I won’t argue with you if you’d rather go strictly by the math and have the points in this scenario.
Money is emotional, after all, like we saw when choosing to pay down debt using the Debt Snowball method.
I went through this exact process when paying my property taxes recently.
Recently, I went through this exact thought process when paying my property taxes. I had the option to use a credit card and pay a 2.1% convenience fee.
I chose to pay cash, even though the points I would have earned were worth $170 more than the convenience fee.
The math indicated I should have taken the points. Still, I didn’t like the idea of paying another 2.1% on top of my already sky-high property taxes.
Even though I lost out on valuable points, money decisions are emotional. It felt better to not pay the extra 2.1% and to keep that cash in the bank.
Setting aside the math and the value of credit card points, there’s another reason I have started using cash more frequently these days because of processing fees.
These processing fees really bother me on principle.
You may disagree, but I don’t think it’s right for businesses to pass this fee onto customers when businesses do benefit by accepting credit cards.
I especially don’t think it’s fair when businesses spring this fee on a customer when he is standing at the register about to pay.
Maybe it’s just me, but these fees annoy me so much that I won’t go back to a business that passes these fees onto customers.
If it’s a business that I simply can’t live without, and there are very few businesses that reach this level, I’ll pay cash instead of using credit.
I’m not insensitive to the fact that certain businesses are struggling with inflation. If a business is having a hard time staying profitable without charging a 4% fee, I would prefer that it raises its prices by 4% instead of surprising me at the cash register with this extra fee.
At least then, I can make an informed decision ahead of time about whether I want to eat at that restaurant or purchase that item before it’s time to pay.
I know this is a polarizing debate. There are business owners who I’m sure would vehemently disagree with my thoughts on the matter. That’s OK.
Businesses are of course free to choose how to run their businesses. As a consumer, I am free to choose to avoid certain businesses.
Have you noticed this processing fees more often lately?
Where do you come out on paying a processing fee to use a credit card?
Do you want the points or the savings?
Or, do you avoid that business altogether?
Let us know in the comments below.
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