What to consider when buying essentials when inflation is high
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With the high cost of living these days, Americans have changed their spending habits to focus on buying only what they need. While things like gas, groceries, and toiletries are considered necessary purchases, the next question is how best to pay for them.
In today’s economy, especially now that most things are more expensive than usual, is it better to use cash, credit or debit card to fund your everyday things? Here’s what the experts have to say.
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Rod GriffinSenior Director of Public Education and Advocacy for the Experian Credit Bureau cites the following as his one universal piece of advice: Consumers should avoid taking on debt to pay for essentials.
With interest rates on the rise — and expectations of them rising even more in the coming months — now is not a good time to take on debt to fund your day-to-day expenses. That means if you can’t afford to pay your credit card bill by the end of the current billing cycle, you should refrain from charging any more expenses until you feel better prepared to do so.
As tempting as it may be to turn to them when you’re short on cash, credit cards already charge notoriously high interest rates — and they’ve risen even further since the Federal Reserve’s recent rate hikes.
“I would advise against using a loan to pay for day-to-day expenses if you can’t pay the balance back on time and in full every month,” says Griffin. Not only is maintaining a balance costly, but it can also damage your credit score if your outstanding balance-to-credit limit ratio or credit utilization rate is high.
Bruce McClary, Senior Vice President of Membership and Communications at National Foundation for Credit Advicealso warns against using the “buy now, pay later” option at checkout as it is essentially borrowing or debt which can ultimately be costly and affect your credit score.
“Many are presented the moment you are ready to complete your purchase and may not require credit approval,” explains McClary. “These are loans that you have to pay back and they can carry interest and fees. There is also a risk that you could quickly [go] take on more debt than you can handle.”
Even if you buy now and pay future payments on time and in full, each purchase you fund in this way will appear as its own separate account on your credit report, meaning multiple purchases may be listed as multiple short-term loans, each of which is closing, once their balances are paid. This, in turn, can cause the average age or length of your credit history to decrease, which is another important factor in calculating your credit score.
Limit your spending by using cash
“Unlike credit cards, which come with higher cash limits, most consumers carry a limited amount of cash, making it easier to stay on budget,” says Griffin. “Carrying cash can help consumers limit their purchases to the essentials on their list and avoid overspending and taking on more debt.”
Similarly, you can use a debit card. Although you’re not physically limited to what’s in your wallet with a debit card, you are limited to what’s in your checking account. Because the money is paid out instantly, you don’t have to worry about getting too close to your credit limit or paying interest – provided you don’t overdraw.
Consider using a debit card that offers rewards, such as Discover the cashback debit account, which offers cardholders 1% cashback up to $3,000 on monthly debit card purchases. Those who take full advantage of these bonuses can earn up to $30 cashback per month and $360 annually.
Discover Bank is a member of the FDIC.
Minimum deposit to open
1% cashback on debit card purchases up to $3,000 per month
Free ATM network
Over 60,000 Allpoint® and MoneyPass® ATMs
ATM fee refund
Mobile Check Deposit
In some cases, a credit card can be helpful
The caveat to the advice above is if you can actually afford (and plan to) pay off your credit card balance monthly, in which case, Using credit can be beneficial when shopping for essentials.
Credit card rewards programs that offer cashback or points and miles with every purchase allow cardholders to stretch their money a little further, Griffin explains. For example, you can use cash-back credit cards to pay your bill when you redeem the rewards as a statement credit.
Consider the Wells Fargo Active Cash® card – which offers unlimited 2% cash rewards on all eligible purchases – and your cash rewards can be redeemed as a bank statement, through a Wells Fargo ATM using a Wells Fargo debit or ATM card, as a direct deposit into a Wells Fargo savings account or checking account, or as paper check. The card with no annual fee also offers new cardholders a $200 cash welcome bonus after spending $1,000 within the first three months of account opening.
On Wells Fargo’s secure website
Unlimited 2% cash rewards on purchases
Earn a $200 Reward Bonus after spending $1,000 on purchases in the first 3 months
0% introductory APR for 15 months from account opening on purchases and qualifying balance transfers; Balance transfers made within 120 days qualify for the introductory rate
17.24%, 22.24% or 27.24% variable APR on purchases and transfers
Introductory fee of 3% (minimum $5) for 120 days from account opening, thereafter up to 5% (minimum $5)
foreign transaction fee
If you can’t pay a credit card bill in full each month, it’s better to use cash or a debit card to fund your day-to-day needs. Otherwise use a Credit cards that offer cash back or reward points can actually help you maximize your spending over the long term.
At the end of the day, it’s important to remember that every consumer is different. A payment method that might work for your friend or family member might not be the best for you. At the very least, McClary recommends having a spending plan based on your current financial situation to cover the bases.
Editorial note: Any opinion, analysis, review, or recommendation expressed in this article is solely that of Select’s editors and has not been reviewed, approved, or otherwise endorsed by any third party.