Here’s when paying with cash can be better than credit card

Sometimes, it pays to pay with cash.  

More merchants are offering a lower price to customers who use cash rather than credit card for a purchase. That means opting for paper over plastic may save you money in some cases.

Just how much?

Typically, cash discounts run about 2% to 4% on purchases, though savings can be higher, experts said.

The share of cash payments with a discount 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 had a discount, Atlanta Fed data shows. While not yet the norm, cash incentives are likely to become more widespread, experts said.

Meanwhile, other businesses add a surcharge when customers use credit cards for purchases. In such cases, paying with cash would also yield savings.

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

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

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

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

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

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

Credit card-processing companies like Visa and Mastercard generally charge merchants 2% to 4% for each transaction, according to the National Retail Federation. These swipe fees are the second-highest cost for most businesses, behind labor costs, the trade group said.

“The merchant is looking at your dollar and getting 98 cents in the end because you’ve chosen to use a card,” Rust said.

Businesses can take two routes to save money: offering a discount for cash purchases (thereby sidestepping those card fees), or putting a surcharge on credit card transactions to offset those fees.

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

Surcharges aren’t legal in all states, though.

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

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

“It’s really important to understand what the cost of that surcharge is going to be, if there is one, before you go ahead and buy,” Schulz said.

Consumers are often swayed by cash incentives, even “significantly likely” to switch to cash payments “specifically because of cash discounts offered,” according to research by Joanna Stavins, a senior 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 noncash payments will instead opt to pay with cash, Stavins wrote in a 2018 paper. This research controls for transaction value and merchant type.

In addition, small, independent businesses are more likely to offer cash discounts than big national chains, Consumer Federation of America’s Rust said.

Gas stations have long offered cash incentives to customers. But a rising number are now 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.

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

Meanwhile, more stations are also offering their own payment platform — like branded debit and credit cards — that yield even more savings than cash, he added.

Discounts are also “very 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 the CNBC Financial Advisor Council.

Some big-ticket spending — like tax bills and college tuition — is also generally best accomplished with cash, said Schulz. The IRS and many universities pass on payment-processing costs to the consumer. (In these cases, that might mean writing a check.)

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

There are times when credit cards have distinct advantages to cash, Rust said.

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

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

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

However, consumers who have trouble paying off their credit card bills in full and on time each month may be better served via another payment method to avoid racking up interest charges, especially as those rates are near record highs.

There’s also a workaround to both cash and credit cards: debit cards. Merchants generally can’t add a surcharge to debit card transactions.

“By and large, debit cards can be a better and cheaper choice in instances where there’s a credit card surcharge,” Schulz said.