Paying With Cash Can Save You up to 4%: Here's When It's Better Than Credit Cards

"Your Credit is Good, But We Need Cash."

This line holds significant meaning today as more merchants encourage customers to use cash by offering lower prices and incentives for those who choose paper over plastic.

This shift is economically significant at a time when digital wallets, cryptocurrencies, and online transactions dominate merchant and trading activities. Using cash can offer more opportunities to save money and provide greater control over spending.

How Much Can You Save?

According to a report, cash discounts typically range between 2% and 4% on purchases, though in some cases, the savings can be even higher. While the prevalence of cash discounts remains relatively low, with only about 3% of all cash payments in 2022 involving a discount, this figure marks a significant increase from 1.8% in 2015, based on data from the Federal Reserve Bank of Atlanta. This upward trend suggests that cash incentives are becoming more common, offering an optimistic outlook for potential future savings.

This is timely as some businesses impose surcharges on credit card transactions, making paying with cash even more advantageous. According to a recent LendingTree survey, nearly 70% of cardholders reported encountering an extra fee for using their credit cards. Thus, avoiding these surcharges by paying in cash can result in substantial savings, providing a strong motivation to consider cash payments.

When Is Cash Really Better?

There are several scenarios where paying with cash is beneficial. For instance, paying for tuition or healthcare in cash offers considerable savings compared to paying with credit and in instalments. Gas stations have also been offering cash discounts of about 5 to 10 cents per gallon.

Today, there's a rising number of gas stations doing so, and "some major retailers are starting to implement the ability to do this in the future," said Patrick De Haan, head of petroleum analysis at GasBuddy.

Purchasing luxury items or paying tax bills can also be advantageous when paying cash, as companies often pass on processing fees to the consumer during card payments.

The Shift Away From Cash

Consumer behaviour has been steadily shifting away from cash for purchases. In 2022, only 18% of transactions were made with cash, a significant decline from 31% in 2016, as reported by the Federal Reserve.

In contrast, the use of credit cards has surged, with their share of transactions increasing from 18% to 31% over the same period. This shift highlights the growing preference for the convenience and rewards offered by credit cards, even though it may come at a higher cost for some purchases.

Why Do Businesses Offer Cash Incentives?

Businesses primarily offer discounts for cash payments to reduce the costs associated with credit card transactions. Credit card processing companies like Visa and Mastercard typically charge merchants fees ranging from 2% to 4% per transaction, as noted by the National Retail Federation.

For many businesses, these swipe fees are their second-highest operating expense, trailing only labour costs. By offering a discount for cash payments, businesses can effectively bypass these fees, leading to lower prices for customers who choose to pay with cash.

When a merchant receives a dollar from a credit card transaction, they're often only getting 98 cents because of these fees. To mitigate these costs, businesses offer a discount for cash payments, effectively bypassing the fees and giving establishments more leeway to offer discounts or lower prices for customers who pay with cash.

"Sometimes, it can make sense to just go ahead and pay cash," said Matt Schulz, Chief Credit Analyst at LendingTree.

Legal Constraints on Surcharges

The legality of surcharges on credit card transactions varies by state. As of May 2023, states like 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. Additionally, Visa has capped surcharges at 3%, down from the previous 4%, to regulate practices.

While the use of credit cards continues to rise, carrying cash can still offer notable benefits, particularly in the form of discounts or avoiding surcharges. As more businesses look for ways to reduce their transaction costs, the prevalence of cash incentives is likely to grow.

Furthermore, there's also the concern of interest rates, which have significantly increased in the last few years, making it harder for people to pay their credit card bills on time. It would be practical to look for other means to pay for goods.

For consumers, being aware of these opportunities can lead to meaningful savings on everyday purchases. So, the next time you're at the checkout, consider reaching for cash instead of your card—you might keep a few extra pounds in your wallet.