Here paying with cash can be better than a credit card

Sometimes, it pays to pay in cash.

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

Just how much?

Experts said cash discounts typically range from 2% to 4% on purchases, although savings can be higher.

And the share of cash payments with a discount remains low — in fact, only about 3% of all cash payments in 2022, according to Federal Reserve Bank of Atlanta data.

However, that share is up more than 60% from 2015, when 1.8% of all cash transactions were discounted, Atlanta Fed data show. Although cash incentives are not yet the norm, they are likely to become more widespread, experts said.

Meanwhile, other companies add additional fees when customers use credit cards for purchases. In such cases, paying in cash will also result in savings.

Nearly 7 in 10 cardholders said the company charged them extra for paying with a credit card, according to a recent LendingTree survey.

The trend comes as consumers steadily shift away from using cash for purchases: Consumers made 18% of payments in cash in 2022, down from 31% in 2016, according to the Federal Reserve. Meanwhile, the share of credit cards rose to 31% from 18% during that period.

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“Sometimes, it might make sense to go ahead and pay cash,” said Matt Schulz, senior credit analyst at LendingTree.

This may be the case even after accounting for credit card rewards, Schulz said. The largest general cash back yield on most credit cards is 2%, for example — a percentage that is often exceeded by cash back discounts, he said.

“If a merchant offers a high enough discount, even if you have the best rewards card in the world, you may end up paying less if you use cash,” said Adam Rust, director of financial services at the Consumer Federation of America. Consumer advocacy group.

Businesses that offer a break on cash purchases generally do so to reduce the costs they incur for credit card transactions.

Credit card processing companies like Visa and Mastercard generally charge merchants fees ranging from 2% to 4% per transaction, according to the National Retail Federation. This pass-through fee is the second highest cost for most companies, after labor costs, the trade group said.

“The merchant looks at your dollar and gets 98 cents at the end because you chose to use the card,” Rust said.

Businesses can take two routes to save money: offer a discount on cash purchases (thus avoiding card fees), or charge additional fees on credit card transactions to offset these fees.

In either case, such practices may lead to lower prices for cash users.

However, surcharges are not legal in all states.

As of May 2023, Connecticut and Massachusetts have banned surcharges, while Colorado and Oklahoma have capped surcharges at 2%, according to the North Carolina Restaurant and Lodging Association.

Visa also set the surcharge at 3% in April 2023, down from 4%, the trade group said.

“It's really important to understand what these additional fees will cost, if there is one, before you go ahead and buy,” Schultz said.

Consumers are often influenced by cash incentives and are even “highly likely” to switch to cash payments “precisely because of the cash discounts offered,” according to research by Joanna Stavins, chief economist and policy advisor at the Federal Reserve Bank of Boston.

When a cash discount is offered, the odds increase by 19.2% that a consumer who prefers cashless payments will instead choose to pay with cash, Stavins wrote in a 2018 paper. This research controlled for transaction value and merchant type.

Additionally, small, independent businesses are more likely to offer cash discounts than large national chains, the Consumer Federation of America Roast said.

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

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

At the same time, more stations are also offering their own payment platform — such as branded debit and credit cards — which deliver more savings than cash, he added.

Deductibles are also “pretty prevalent” when paying for health care, said Carolyn McClanahan, a certified financial planner and physician based in Jacksonville, Florida.

McClanahan is also a member of CNBC's Board of Financial Advisors.

Some big spending — such as tax bills and college fees — are generally better done with cash, Schulz said. The IRS and many universities pass on the payment processing costs to the consumer. (In these cases, that may mean writing a check.)

“There are definitely more times when you probably shouldn't use credit cards because of the fees involved,” he said.

There are times when credit cards have distinct advantages over cash, Rost said.

For example, unlike cash, credit cards carry some protections related to fraud and product returns, Schulz said.

That's why using a card may make more sense — even if there are fees — if consumers are first-time shoppers at a particular store, buying something they might want to return in the future, or if they bought something fragile that they had delivered, he added.

In addition, a credit card may be better for those who want to keep a close eye on their spending, or generally prefer the ease and convenience of using a card, Schulz said.

However, consumers who have difficulty paying their credit card bills in full and on time each month may be better served by another payment method to avoid accumulating interest charges, especially as these rates are near record levels.

There's also an alternative solution to both cash and credit cards: debit cards. Merchants generally cannot add additional fees to debit card transactions.

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