This is when paying with cash can be better than by credit card

Sometimes it pays to pay in cash. a

More and more merchants are offering a lower price to customers who use cash instead of a credit card for a purchase. This means that choosing paper instead of plastic can save you money in some cases.

How many?

Typically, cash rebates are about 2% to 4% on purchases, although the savings can be higher, experts said.

The share of discounted cash payments is still low — in fact, only about 3% of all cash payments in 2022, according to data from the Federal Reserve Bank of Atlanta.

However, that share is up more than 60% from 2015, when 1.8% of all cash transactions were at a discount, according to data from the Atlanta Fed. While not yet the norm, financial incentives are likely to become more widespread, experts say.

Meanwhile, other companies charge a fee when customers use credit cards for purchases. In such cases, cash payment would also be possible deliver savings.

Nearly seven in ten cardholders say a company has done this charged them extra for paying with a credit card, according to a recent LendingTree survey.

The trend comes as consumers have steadily done pushed away of using cash for purchases: According to the Federal Reserve, consumers would make 18% of payments with cash in 2022, up from 31% in 2016. Meanwhile, credit cards’ share grew from 18% in that period to 31%.

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“Sometimes it can make sense to just pay cash,” says Matt Schulz, chief credit analyst at LendingTree.

That may be the case even when you take credit card rewards into account, Schulz said. For example, the largest overall cash back return on most credit cards is 2% — a rate often exceeded by cash rebates, he said.

“If the merchant sets a high enough discount, even if you have the best rewards card in the world, you may still pay less if you use cash,” says Adam Rust, director of financial services at the Consumer Federation of America. an interest group for consumers.

Companies that offer a break on cash purchases typically do so to reduce costs on credit card transactions.

Credit card processing companies such as Visa and Mastercard in general charge merchants According to the National Retail Federation, 2% to 4% for each transaction. These swipe fees are the second-highest expense for most companies, after labor costs, the trade group said.

“The merchant looks at your dollar and ends up getting 98 cents because you chose to use a card,” Rust said.

Businesses can take two routes to save money: offering a discount on cash purchases (thus bypassing card fees), or charging a surcharge on credit card transactions to offset these costs.

Either way, such practices can yield lower prices for cash users.

Surcharges are not legal in all states.

As of May 2023, Connecticut and Massachusetts had banned surcharges, while Colorado and Oklahoma limited the maximum surcharge to 2%, according to the North Carolina Restaurant and Lodging Association.

Visa too limited allowances at 3% in April 2023, up from 4%, the trade group said.

“It’s very important to understand what the cost of that surcharge will be, if there is one, before you proceed with purchasing,” Schulz said.

Consumers are often swayed by cash incentives and are even “very likely” to switch to cash payments “specifically because of the cash discounts offered,” according to research from Joanna Stavins, a senior economist and policy advisor at the Federal Reserve Bank of Boston.

When a cash discount is offered, the odds are increased increase by 19.2% that a consumer who prefers non-cash payments will instead choose to pay with cash, Stavins wrote in a 2018 article. This study controls for transaction value and merchant type.

In addition, small, independent businesses are more likely to offer cash discounts than large national chains, according to Rust of the Consumer Federation of America.

Gas stations have long offered cash incentives to customers. But a growing number are now doing so, and “some major retailers are starting to implement the ability to do this in the future,” says Patrick De Haan, head of petroleum analysis at GasBuddy.

The average cash discount was about 5 to 10 cents per gallon, De Haan said.

Meanwhile, more and more stations are also offering their own payment platforms – such as name-brand debit and credit cards – which deliver even greater savings than cash, he added.

Discounts are also “very common” when paying for health care, says Carolyn McClanahan, a certified financial planner and physician based in Jacksonville, Florida.

McClanahan is also a member of the CNBC Financial Advisor Council.

Some big expenses — like tax bills and college tuition — are also generally best paid with cash, Schulz said. The IRS and many universities pass payment processing costs on to consumers. (In these cases, that may mean writing a check.)

“There are certainly some bigger times when you probably shouldn’t use credit cards because of the fees involved,” he said.

There are times when credit cards have clear advantages over cash, Rust said.

For example, unlike cash, credit cards offer certain protections regarding fraud and product returns, Schulz said.

Therefore, using a card may make more sense – even if there are fees involved – if consumers are shopping at a particular store for the first time, purchasing something they may want to return in the future, or purchasing something fragile. have been delivered, he added.

Additionally, a credit card may be better for those who want to track their spending more closely, or just generally prefer the convenience and convenience of using a card, Schulz said.

However, consumers who struggle to pay off their credit card bills in full and on time each month may be better served using another payment method to avoid incurring interest charges, especially as these rates are near record highs.

There is also a solution for both cash and credit cards: debit cards. Merchants in general can’t add a surcharge on debit card transactions.

“In general, debit cards can be a better and cheaper choice in cases where there are credit card surcharges,” Schulz said.