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Sometimes it pays to pay in cash.
More and more merchants are offering lower prices to customers who use cash rather than a credit card to make purchases. This means that in some cases, choosing paper over plastic can save you money.
How many?
Typically, purchase discounts range from 2% to 4%, although experts say the savings can be higher.
The share of discounted cash transactions is still low—in fact, it will only account for about 3% of all cash transactions in 2022, according to 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 the Atlanta Fed. While cash incentives are not yet the norm, they are likely to become more common, experts say.
Meanwhile, other companies charge additional fees when customers use credit cards for purchases. In such cases, payment in cash will also be bring savings.
Nearly 7 out of 10 cardholders said the business has charged them extra for credit card payments, according to a recent LendingTree survey.
This trend comes as consumers continually moved away from using cash for purchases: Consumers made 18% of their payments in cash in 2022, up from 31% in 2016, according to the Federal Reserve. Meanwhile, the share of credit cards rose to 31% from 18% during the period.
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“Sometimes it makes sense to just pay cash,” said Matt Schultz, chief credit analyst at LendingTree.
This could be the case even after credit card rewards are taken into account, Schultz said. For example, the highest overall cash back rate on most credit cards is 2% — a percentage that often exceeds the cash discount rate, he said.
“If a 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,” said Adam Rust, director of financial services for the Consumer Federation of America. consumer protection group.
Why does business give cash incentives?
Businesses that offer a break from cash purchases usually do so to reduce the costs they incur 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% per transaction. Those fees are the second-largest cost for most businesses, behind labor costs, according to the trade group.
“The merchant looks at your dollar and ends up with 98 cents because you chose to use the card,” Rust said.
Businesses can take two routes to save money: offer a discount on cash purchases (thereby bypassing card fees) or impose an additional fee on credit card transactions to offset those fees.
In any case, this practice may result in lower prices for cash users.
Additional payments illegal in all states, really.
According to the North Carolina Restaurant and Lodging Association, as of May 2023, Connecticut and Massachusetts had outlawed surcharges, while Colorado and Oklahoma capped the maximum surcharge at 2%.
Visa also limited allowances in April 2023 it will be 3%, up from 4%, the trade group said.
“It’s important to understand what the cost of this premium, if any, will be before you commit to purchasing,” Schultz said.
When to pay in cash
According to research by Joanna Stavins, a senior economist and policy adviser at the Federal Reserve Bank of Boston, consumers are often swayed by cash incentives and are even “significantly likely” to switch to cash payments, “particularly because of the cash discounts offered.”
When a cash discount is offered, the odds are will increase by 19.2% that a consumer who prefers cashless payments will choose to pay with cash instead, Stavins wrote in a 2018 paper. This study controls for transaction cost and merchant type.
Additionally, small independent businesses are more likely to offer cash discounts than large national chains, according to Consumer Federation of America Rust.
Sometimes it makes more sense to just pay cash.
Matt Schultz
Chief Credit Analyst at LendingTree
Gas stations have long offered cash incentives to customers. But a growing number are doing it now, and “some of the larger retailers are starting to realize the opportunity to do this in the future,” said Patrick De Haan, head of petroleum analysis at GasBuddy.
The average cash discount is 5 to 10 cents per gallon, De Haan said.
Meanwhile, more stations are also offering their own payment platforms, such as branded debit and credit cards, which bring even greater savings than cash, he added.
Rebates are also “very common” for health care payments, said Carolyn McClanahan, a certified financial planner and physician in Jacksonville, Florida.
McClanahan is also a member of the CNBC Council of Financial Advisors.
Some big expenses, like taxes and college tuition, are usually best paid for in cash, Schultz said. The IRS and many universities pass on payment processing costs to the consumer. (In these cases, this may mean writing a check.)
“There are certainly situations where you probably shouldn’t use credit cards because of the fees,” he said.
Credit cards sometimes have benefits
There are times when credit cards have distinct advantages over cash, Rust says.
For example, unlike cash, credit cards offer some protection against fraud and product returns, Schultz said.
This is why using a card may make more sense (even if there is a fee) if consumers are buying for the first time at a particular store, buying something they might want to return in the future, or if buying something fragile that they already delivered. , he added.
Additionally, a credit card may be better for those who want to track their spending more closely or simply prefer the ease and convenience of using a card, Schultz said.
However, consumers who are having trouble paying their credit card bills in full and on time each month may be better off using another payment method to avoid interest charges, especially since these rates are near record highs.
There is also a workaround for both cash and credit cards: debit cards. Merchants in general I can’t add debit card transaction fee.
“In general, debit cards may be a better, cheaper choice in situations where there are credit card fees,” Schultz said.