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Forget Cashback Rewards, Go Cash

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I was in New York a few weekends ago and saw that gas stations listed two prices for fuel, one if you paid in cash and the other if you paid in credit. The credit price was a little over 2% higher than the cash price ($2.49 vs. $2.44) and it was clear that you paid the lower price for paying cash. None of this “wink wink nudge nudge” stuff, they full out stated the price for gas with cash was lower.

Against the credit card merchant policy? Maybe.

Did we really care? No.

We paid cash… and saved 2% on the price, rather than getting 1% cashback on the backend.

Why Cash Is King

Credit card rewards work on one simple principle. When you charge a purchase to your credit card, the company charges the merchant somewhere in the neighborhood of 3% of the sale to process the transaction. That fee is split up between the credit card company and various middle men processors. The end result is that the credit card company passes some of that back to you as “cash back” or “points.” The gas station offered two prices because they are willing to split their savings with you. Rather than pay the 3% (or higher) fee, they’re going to give you 2% off. They save 1%, you earn an additional 1% on top of the 1% cashback you probably get, and everyone except the credit card company wins.

In the cases where they offer 5% cashback, they’re using that category of purchases as a loss leader to get a “share of your wallet.”

Use Cash As Negotiating Tactic

Cash can be a very powerful negotiating tactic. There’s something about cash that makes a deal seem “more real.” Go to any market where negotiation is expected and see what happens when you actually pull out cash.

One of my best memories as a kid was negotiating with a vendor in China for a pack of post cards. I was a kid, maybe ten or so, and the thrill of buying the post cards was in the negotiation. To be honest, I didn’t know much about negotiation.

All I knew was that the price started at 30 RMB and by the time we were done, I paid only 8 RMB. I hemmed and hawed, saying it was too expensive, and let the seller lower the price to 10 RMB. Then I went to my parents for money and asked for only 8 RMB. I went back to the vendor and said I only had 8 and he sold it to me for that price. Cash is king!

Some would argue that paying in cash lets the seller avoid taxes. Yes, paying in cash makes it possible because there is no paper trail (unless you’re issued a receipt for your purchase). However, it is the responsibility of the seller to follow the law and pay their taxes. It is not the responsibility of the buyer.

So, forget cashback rewards, forget credit cards, starting using cash.

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20 Responses to “Forget Cashback Rewards, Go Cash”

  1. Richard says:

    While I agree with the use of cash as a negotiating tactic, and that cash is indeed king, I think that’s separate and apart your gas example. They tell you up front, here’s what you’re going to pay with cash, and with credit. You’re not negotiating for the gas.

    If I’m getting 5% back, that means I’m really paying $2.3655 for the gas, versus the cash price of $2.44. That’s almost $0.08 cheaper than the cash price! Whether they’re only doing it “to get a share of my wallet” or not, seems like 5% cashback is a much better deal to me.

    Of course, we could get into the benefits of keeping your cash (earning interest) versus getting into debt, the time it takes to get the cashback, etc etc… but I was simply comparing the raw prices.

  2. Diasdiem says:

    I’ve never been to a gas station here in Texas where they had “convenience fees” for credit card purchases. Gas has always just been the same price. Likewise for most stores. The only exceptions I’ve seen are a few Mom & Pop stores where they either ignore the merchant agreement, or offer cash “discounts”. I know the Spec’s liquor store here in town gives 5% off sticker price for cash purchases, which makes me wonder what they pay in merchant fees. Actually more likely the regular price is the cash price with the merchant fee added. So in situations where there is no price difference between cash and credit, it makes more sense for me to use a credit card to get the cash back reward, especially on my new card that gives 5% back on gas, groceries, and restaurants the first 12 months.

  3. I have to fully agree with Jim here, cash is the way to go. At a minimum, when you pay cash the deal is done and you get on with your life. With credit, you drive off with the purchase, but you get the tail end of the transaction (your ACTUAL payment) 30 days later. If you pay off your balances in full each month, that’s virtually as good as cash, but statistically, 70% of cardholders carry a balance, which means interest.

    From a pure life simplification/debt reduction standpoint, cash is always better.

    • Richard says:

      Let me put this into perspective here. Say you pay $100 a month in gas. With cash, I’d have paid $1,200 by year-end. Using a credit card that gives you 5% back, I’d have actually paid $1,140 — saving $60.

      This, of course ASSUMES that you do NOT carry a balance. If you do, that’s a whole different discussion.

      You’re right in terms on “simplification” I suppose. Yes, at the end of a cash transaction, that’s it. But to be honest, it really doesn’t take too much to simply click a few buttons to pay off your credit card at the end of each billing cycle.

      In terms of debt reduction, however, I put to you that maximizing the use of cashback will better help in that regard. For instance, just this example saved me $60 this year. That’s $60 that can now go towards my house, or my car, or student loan, or whatever. And what about that 5% on groceries? At the drugstore? Movies? Bookstores? EVERYTHING?

      Not that I know of cards that will give you 5% back on EVERYTHING, but the point remains… cashback is in essence, FREE money, *ASSUMING you do not carry a balance*. Free money is better than no free money when it comes to debt reduction, I say.

  4. Patrick says:

    Cash can be a great bargaining tool in other countries, but may not apply as much in America. In smaller stores or for big purchases, cash can save you some money and can be used as a bargaining chip. In most major retail stores, they don’t seem to care whether or not you use a credit card.

  5. Madame X says:

    Not all gas stations here (in NYC) have different prices for cash and credit. Some charge the same, so you have to look closely before you fill up! It’s so annoying when you think you’re getting a lower price and then discover the small print…

  6. dilbert69 says:

    My HSBC DirectRewards MasterCard pays 5% cash on gas, groceries, and drugstore purchases, so it generally pays to pay the credit price and get the 5% back. I pay the bill in full each payday (every 14 days), so I never pay a penny of interest, and I pay it through my bank’s online bill pay service, so I don’t pay for stamps or check printing. The Texaco station near my local Costco has very low prices because they have to compete with Costco, but Costco takes only debit and American Express, and Texaco takes my card, so it generally works out cheaper for me than Costco, with shorter lines.

  7. We run a business here in Taiwan, and we specifically don’t take credit cards in any form. Why? The best prices are for cash, and that’s what we give our customers.

    While we may win a few extra dollars, having that extra middleman just isn’t worth the hassle of letting someone else look after our money.

    With installation fees, monthly fees, fees on each transaction, and numerous penalty fees that may apply, plus the risk of the CC credit card NOT paying up promptly due to chargebacks, we could actually end up out of pocket for transactions that, cashwise, would already have been ‘settled’.

    The upshot is that, for the foreseeable future, we are not likely to take Credit cards. If we were to, we’d likely have to increase our prices for ALL of our customers by at least 5% to cover most costs. This is not an unusual choice in many more cash-based economies.

    I really don’t understand why consumers think credit card spending is better. It’s not. It’s not better for you, it’s not better for me. And it’s not generally better for society.

    Kenneth

  8. Kenneth–You raise a good point about consumers thinking “credit card spending is better.”

    At this point it’s probably more a societal norm than anything else, juiced by the bells and whistles added by the banks to get us comfortable with using them.

    Though there are nuances between the two, bank debit cards function substantially the same way as credit cards, minus the debt overhang, but credit cards have been around longer. We’ve lowered our defenses in regard to credit cards which is why so many people are in trouble with them. Though they have certain benefits, they can seemlessly slip into debt.

  9. Nathan says:

    Using cash is an annoyance. I never carry coins because they just jingle and make holes in my pocket. I don’t like to waste my time filling up as often, so I always fill to the max. Since this almost never turns out to be a round number, I use my card.

    With my rewards credit card at 3% cash back, I need to see a $0.09 cash discount per gallon before it’s cheaper to pay with cash.

    As a side note, I wish I were still seeing $2.50 gas. It’s $3 everywhere in California.

  10. Eric says:

    Interesting. Haven’t seen it where I’m at yet. But unless the gas station offers more than a 5% discount, I’m putting gas on the card. :)

  11. I like to use cash because I usually spend less money that way. There is something about having to hand cash over to someone that slows down my spending. Debit cards and credit cards just don’t have the same barrier to spending.

  12. Dan says:

    It’s interesting that everyone has their own method and there is no clear consensus on the cash vs. credit card debate. I find it ironic that people use their credit cards, for instance, to save 1% back on everything (plus other rewards in some cases), yet if no one used credit cards, all prices would probably be 3-5% cheaper. The way I see it though, is that my payment habits will not affect the market as a whole (I realize this type of thinking has a tendency to get people in trouble, but it’s true). Therefore, I will charge everything I possibly can, regardless how small the purchase price. In CT, I’d say at least 50% of all gas stations now charge different prices for gas based on payment type. Since I get 3% back on gas purchases, I would expect to see a difference > $.10/gallon before I opted to pay cash. The difference is usually $.04, but is often as high as $.10/gallon.

  13. No Debt Plan says:

    My AMEX Blue Cash pays 5% for gas (in the second tier). So it would depend on where I was in my rewards cycle — if I was still in the 1st tier I wouldn’t pay with credit.

    Of course I never carry any cash, so that’s a consideration as well.

  14. aquaswim47 says:

    Shell is notorious for charging more to credit customers than cash customers. I am fine with them doing that if they advertise “the higher price” and give a cash price as well (that is a reduction).

  15. aquaswim47 says:

    I really like InvestorBlogger’s comments. I personally have a 5% rewards card (and that might last awhile). If it no longer is 5% cash back than I won’t use it anymore. It is the Pentagon CU card.

  16. aua868s says:

    i love the american express blue card…good bet for the 5% cash back

  17. Jenn says:

    In our area I’ve never seen any business offer different prices for cash vs credit purchases. I purchase absolutely everything I can on my CC to get flight rewards. I pay off the card balance every Friday and transfer the details of my weekly spending to my spreadsheet, replacing predicted amounts with the actual numbers. I’ve NEVER paid interest on my CC, however in the next few weeks we’ll have the final few points needed for our 4 flights to Europe this summer.

    I don’t think anyone mentioned it but purchases on many credit cards are automatically insured, which you certainly don’t get with cash or debit. In addition, paying all my recurring monthly bills (phone, cell, internet, insurance) plus gas and groceries on the card means I get an online itemized spending history from the VISA website which I can transfer to my Excel sreadsheet. No tracking cash purchases on the envelope or keeping receipts.

    Maybe if I was being penalized for using my card I’d have to reassess my spending practices.

  18. Mike says:

    6% off gas for me.


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