Question

Ted and Tiffany are meeting Mitch and Amber at the Green Turtle Club. Wanting to set some limits on his expenses that evening Ted stops at an ATM and uses his credit card to get a cash advance. When the two couples meet for dinner Tiffany tells Amber she is going to go for the lobster dinner since Ted is rolling in cash! Mitch overhears the conversation and starts laughing at ted for making such a financial blunder. Ted argues that Mitch is blind to the convenience and control of cash advances as statistics prove you spend less with cash than on a credit card.

Who do you agree with? Why? Who's wrong ?

Answer 1

• If there was just one thing you could do to improve your personal financial situation, it would be sticking to cold hard cash for your routine daily transactions.
• Using cash for routine daily purchases keeps you aware of your spending habits and helps you control them.
• Using a debit card instead of a credit card for web purchases helps you stay out of the high-interest-debt trap.
• Using a credit card encourages people to buy more and spend more.
• There is also a practical security advantage with debit and credit cards. Debit cards are protected by your personal identification number (PIN) and credit cards by a chip, your signature, and, for some cards, a PIN number as well. Cash is only protected by your ability to defend it should someone try to take it from you.
• Cards and payment apps are now nearly as widely accepted as cash in the U.S. and many other countries. Very small transactions at very small stores can be exceptions. And yet, from a personal finance view, cash is almost always the better choice for making a purchase. Here are some reasons why -
  • The Temptation to Overpay -
    • One of the major drawback of credit and debit cards is that they encourage you to spend more than you should do, and more than you intend to, by giving you easy access to capital.
    • Advanced technologies such Tap-to-pay technology carries that to a whole new level.
    • When you use cash, spending more than you intended requires going to a bank or ATM to get more money and then going back to the store to complete the purchase. While some businesses have in-store ATMs, most charge fees in addition to the fees your bank charges. For most people, these factors will cause them to reconsider whether their budgets can handle the strain.
    • Generally speaking, only carrying the cash you are prepared to pay for a given product will prevent you from buying the next level up and paying for features you don't need.
    • Of course, this works for smaller-scale purchases. Buying a computer or a car requires more cash than most of us like to carry around. If a check can't be used, a debit card is better than a credit card because you are spending money you have rather than money you haven't even earned yet.
  • The Over-Shopping Trap -
    • Stores are designed to display products appealingly and encourage impulse buying. And cards encourage overpaying for one item, they allow you to buy more things than you mean to.
    • Studies have found that people will spend more when they use a credit card compared to cash.
    • To avoid this carry only enough cash to buy the things on your list.

Cash Vs Credit cards -

• Cash is defined strictly here as the money you have already earned that is sitting there for you to use.
• Using a credit card to take a cash advance and then carrying the cash with you will not solve the problem.
• In fact, that's the worst alternative. You've just added a fat fee for a cash advance to the high-interest loan you're using to cover your expenses.
• Cash has one very clear advantage over using a credit card: If you use credit and end up carrying a balance, you will incur interest on your purchase. and by using cash you are saving on this extra cost.

In given case,  Ted who wants to set some limits on his expenses, uses his credit card to get a cash advance.

In the conversation between Ted and Mitch, Ted is wrong and we agree with Mitch as by using his credit card to get a cash advance he has failed to achive his objective to limit his expenses as he has ended up paying extra fee for a cash advance to the high- interest loan.