Plastic money, such as credit and debit cards, has transformed the way we handle transactions.
While it offers convenience, rewards, and enhanced security, it also introduces risks like overspending and hidden fees.
*Updated 7/26/2024
Understanding the pros and cons of plastic money ensures you make smarter financial decisions.
When used poorly, it mostly means you’ll end up in debt. Here are some things to keep in mind about plastic money before using it.
Article Shortcuts:
- Top 4 Advantages of Using Plastic Money
- 3 Cons of Using Plastic Money
- Use Your Credit Cards Wisely
- Credit Card Alternatives
- Tips for Reducing Your Credit Card Debt
What is Plastic Money, and How Does It Work?
Plastic money is any card that can be used as a substitute for cash. The most common type of plastic money is a credit card, but debit cards, gift cards, and store cards are also considered plastic money.
When you use a credit card, you borrow money from the bank that issued the card. You will then have to pay back the money you borrowed if you want to make credit card payments, plus interest and fees.
Debit cards work differently. When you use a debit card, the money is taken directly from your bank account.
Top 4 Advantages of Using Plastic Money
If you are wondering why you should trade those bills for a piece of plastic, read on.
Let's look more deeply into each of these advantages in greater detail.
1. Convenience: Fast and Cash-Free Transactions
Plastic money eliminates the need to carry cash, making transactions quick and seamless, whether in stores or online.
Credit and debit cards also allow access to global markets without currency exchange hassle
There is no way to send physical bills via the internet, so you can only use cash in brick-and-mortar stores. With cards, you can shop from the convenience of your home.
Lastly, you can use your card to make purchases anywhere.
The card in your pocket is likely issued by either Visa or Mastercard, which are accepted worldwide. Having a card on you when traveling will remove the stress of finding an exchange or having to calculate the price before you shop.
2. Rewards and Cashback: Benefits of Credit Cards
Rewards are a popular way for companies to entice customers to use their cards. By offering travel miles, points, cash back, or other benefits, companies encourage customers to spend more money.
- Travel rewards are a great way to save money on your next vacation. Many cards offer travel miles or points that can be redeemed for discounts on airfare, hotels, and rental cars.
- Cashback is another popular type of reward that allows you to get some of your money back on select purchases. Some of the best rewards credit cards offer up to 5% cash back on categories like gas and groceries. Additionally, many credit card companies offer specialized cards tailored to the needs of foreigners. These cards may come with features such as no foreign transaction fees and travel perks specifically designed to cater to international travellers.
- Points are a versatile reward you can redeem for merchandise, gift cards, or even cash. Some cards allow you to transfer your points to airline miles or hotel loyalty programs.
3. Security: Fraud Prevention Features with Plastic Money
Credit cards are the clear winner over cash when it comes to safety. They are harder to lose and also offer protection against fraud.
If your credit card gets stolen, you can report the theft and have the charges reversed. You can also dispute fraudulent charges and have them removed.
Cash, on the other hand, offers no such protection. If you're the victim of theft or fraud that robs you of it, you have no way to get your money back.
4. Cards can help you build credit
Credit cards are often thought of as a tool for people who already have good credit.
However, when used responsibly, credit cards can help you improve your credit score. After all, payment history is one of the essential factors in determining your credit score.
Using a credit card and making on-time repayments on your bills, you can show that you can manage your debts responsibly, making you a good candidate for a loan in the future.
3 Cons of Using Plastic Money
As with most things, there are also some drawbacks to using plastic money.
1. Overspending: A Major Plastic Money Risk
One of the biggest dangers of credit cards is spending more money than you have.
Since it allows you to borrow against your credit limit, you might be tempted to leave the debt payment to your “future self,” who might not be able to afford the repayment.
With cash, your limit is the last bill in your wallet, and there’s no way to overstep.
2. Credit Card Debt
Speaking of purchases you cannot afford, the key to using credit cards responsibly is to pay your credit card bill in full each month.
If you don’t do that, the interest will keep piling up, and you might end up trapped. What’s more, if you miss a payment or make one late, your credit card company will likely raise your interest rate or impose fees.
Before you know it, you could be in serious credit card debt, leading to further financial difficulties.
3. High Fees and Interest Rates: Downsides of Plastic Money
It’s essential to be aware of any hidden fees lurking in your contract.
One of the most common hidden fees is the annual fee. Many credit card companies charge a yearly fee just for using their card.
This fee can range from a few to several hundred dollars, so reading the fine print before signing up for a new card is crucial.
Another typically hidden fee is the late payment fee. If you don't pay your bill on time, you'll be charged a late payment fee. This fee is usually around $30, but it can be higher if you have a high balance.
Finally, many cards also charge a cash advance fee when using your card to get cash from an ATM.
While there are ways to take money from the ATM without paying fees, you’ll usually have to factor 3% of the cash advance into your budget before taking out cash.
By being aware of these hidden fees, you can avoid them and save yourself a lot of money in the long run.
Tips for Using Plastic Money Responsibly
If you decide to use credit cards, here are the four fool-proof things you can do to avoid getting into debt:
- Charge only what you can afford: Pay off your balance in full each month.
- Stay within limits: Avoid spending up to your credit limit, even if it's available.
- Pay on time: Avoid late fees by setting reminders for due dates.
- Track your spending: Monitor card usage to prevent overspending.
These habits will help you enjoy the benefits of plastic money without falling into financial trouble.
Alternatives to Plastic Money: Credit-Free Payment Options
If you’re concerned about debt, several alternatives to plastic money offer the same convenience without the risks.
- Debit Cards: Linked directly to your checking account, debit cards allow you to spend only what’s available, combining the ease of plastic money with greater spending control and security.
- Prepaid Cards: These cards must be pre-loaded with cash, helping you avoid overspending and eliminating the need for monthly bills.
- Cash Payments: Using cash ensures complete budget control, with no interest rates or hidden fees.
Tips for Reducing Your Credit Card Debt
If you already have credit card debt, don't despair. There are a few things you can do to get out of it. Try to pay more than the minimum payment each month. This will help you pay off your balance faster.
If you find yourself struggling to pay your debts, there are many helpful credit counseling resources you can use. Credit counseling services help people with credit card debt by negotiating with credit card companies on their behalf.
Second, if you have multiple credit cards, focus on paying off the one with the highest interest rate first. And finally, try to avoid using your credit cards until you've paid off your debt.
Building up Your Overall Financial Health
Think about maintaining long-term financial health. Responsible spending habits and passive income can give you a cozy financial cushion, but these things take a while to build.
Always scrambling to pay off debt and being afraid of your own credit card is no way to live, so we suggest changing your mindset entirely.
Instead of letting it get out of hand, think about small habits you can adopt that will one day lead to great business ideas and complete financial freedom.
FAQ
1. What is plastic money?
Plastic money refers to physical cards, like credit, debit, or prepaid cards, used for cashless transactions.
2. What are the pros and cons of plastic money?
Pros include convenience and rewards, while cons involve fees, debt risks, and overspending.
3. How does plastic money compare to digital wallets?
While both offer cashless payments, plastic money works offline, whereas digital wallets require an internet connection.
4. Is plastic money safe?
Yes, it offers security features like PINs and fraud alerts, though it is still vulnerable to misuse if lost or stolen.
5. Can plastic money help build credit?
Responsible credit card use improves credit scores, but misuse can harm them.
6. What are the alternatives to plastic money?
Digital wallets, mobile payments, and cryptocurrencies are emerging alternatives to plastic money.
In Conclusion
Plastic money has its pros and cons, but it can be a great tool for small business owners.
While plastic money offers convenience and financial flexibility, it’s essential to manage it responsibly to avoid the pitfalls of debt and overspending.
Considering both the pros and cons of plastic can help you make smarter financial decisions.
Author Bio
Igor is a Co-Founder of Fortunly.com, a company that's making finance approachable with reviews, news, and market analysis. Their team is dedicated to deconstructing and explaining financial procedures, interpreting terminology, and reducing complex transactions into simple steps.
