The Pros and Cons of Paying With Cash

If the recent data breaches have you rethinking plastic, here are some reasons for sticking to cash. 

 A young woman reaches for cash in a green wallet.

Paying with cash might protect you from identity thieves, but there are other costs to consider.

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The recent data breaches at Target and Neiman Marcus have some consumers questioning how they pay for purchases and if cash is still king despite the convenience of plastic.

The day when the Target breaches made headlines in December, Karen Swim, 50, a marketing professional in Sterling Heights, Mich., had planned to go shopping at the big box retailer. "It could have happened to me, so it freaked me out," she says. "I've already been a victim of a cyberattack on my website, and that was difficult to fix it." Swim now uses cash instead of a credit or debit card for the bulk of her shopping.

While some consumers like Swim have reduced their card usage, Bill Hampel, chief economist at the Credit Union National Association, doesn't foresee a widespread shift to cash. "As soon as the issuing financial institutions heard about the breach, they immediately sprang into action," he says. "Seventy-nine percent of credit unions have or will bulk-reissue all affected cards. Because of that immediate response the fraud is very unlikely to flow through to consumers." Many customers called to ask if their card had been impacted by the breaches, but most haven't stopped using them, he adds. 

[Read: How to Protect Your Credit Card From a Data Breach.]

Still, if you’re concerned about data breaches and your cards being compromised, here are some of the advantages of paying cash versus using a card:

More mindful spending. Studies show that consumers spend less when they hand over cold hard cash versus swiping plastic, since cash feels more like real money. "When you have the tangible money in your hand and you can physically feel it depleting each time you spend, you are much more likely to notice what you are buying and be careful about it, rather than if you just have the ease of swiping a card," says Elle Kaplan, CEO and founding partner of LexION Capital Management in New York. 

Kaplan suggests a cash-only diet to clients who need to rein in their spending. They might withdraw $100 from an ATM on Sunday, and try to stretch that money over the week. "The mindless $20 purchases stop pretty fast," she says. "Once you spend that $100, you're done."

Since switching to cash, Swim has seen her own spending decrease. "I'm more under budget now because the only time I'll carry a large amount of cash is if I'm going to make a larger purchase," she says

[Read: 8 Potential Pitfalls of Credit Cards.]

Less marketing. When you swipe plastic, retailers often ask for additional information such as your ZIP code and email address so they can market to you later. "With cash, no one really asks you for your email, so it cuts down on some of the email marketing and some of the offers that you get," Swim says. And when retailers don't have your email or mailing address, that information can't be stolen in a data breach.

Of course, there are a few downsides to cash. Here's a look at those:

Tougher to track. For consumers who carefully track their spending via budgeting apps that automatically input credit or debit purchases, cash may be less convenient. "Some consumers, especially younger ones, run everything through a debit card and they're online twice a day checking the real-time balances in their accounts," Hampel says. Instead of checking her spending online, Swim now asks for paper receipts and inputs purchases manually.

Risk of loss or theft. Unlike credit or debit cards, cash has no consumer protection. Once it's gone, it's gone. "There's always the risk if you carry cash that you can lose it," Kaplan says. "If you carry credit cards and you lose those, you can cancel them."

Unlike cash, the consumer seldom absorbs the cost of a lost credit card or unauthorized purchases on a card. "About the only time I'm liable is if I'm involved in having my card compromised, and I don't report it," Hampel says. "The exposure of the consumer to actual loss because of a data breach is very low."

[See: 9 Ways to Keep Your Phone Safe.]

Some purchases require plastic. While Swim uses cash most of the time, she acknowledges that going cold turkey on cards might not be possible. "Some of my business subscriptions I can't pay in cash, so I use a card for those," she says. Merchants such as hotels and car rental agencies sometimes also require credit or debit cards. And without a credit history, securing a mortgage, car loan or other type of loan could prove challenging.

Once clients have their spending under control, Kaplan encourages them to start using credit cards and paying them off in full each month so they can establish a credit history and earn rewards. "Data breaches are a reason to always be on your toes," she says. "They're not a reason to avoid a credit card."