When you buy something, it is good to ask yourself whether you want to pay in cash or by credit card. There are pros and cons of each. This article highlights which way is best to maximize your finances.
Let me start with an example of whether you should pay cash or credit card for car maintenance.
Pay with cash or credit card Repair a car
After six months of increasingly loud clicking noises coming from my engine, I decided to take my car in for a free inspection.
After only about five minutes, the auto mechanic said he was sure my fan unit was broken and needed to be replaced. Awesome. “How many?” I have asked.
His brother, the operations manager, contacted me and said, “$925 before taxes, that’s about $1,004 after taxes.” The sales tax is 8.5% in San Francisco.
Relief! I was mentally preparing for a bill of over $3,000 because the clicking sound was near the engine. If you go on the car forums, you always read about the worst situations.
Time to decide how you will pay the biggest costs
The operations manager told me to come back next week because he had to order the entire fan unit. No problem. In the meantime, I decided to do what any rational person would do: look online to see what fan units would cost.
A number of options emerged that were 30% lower than the store’s stated price. The next week I called the store owner and asked why such a huge price difference. He said the difference was between an original manufacturer part and a replica without warranty.
I sensed his weakness on the phone and asked him if there was any way to get the price down. After stumbling through it a bit um And awwhe replied, “Yes, if you pay “cash” and not by check, I will lower the curbside price to $750.“
“Will I still receive a purchase receipt and the warranty?” I have asked.
“Absolute,” he replied.
Seductive! What would you do?
The dilemma of paying cash to save costs
A 25% savings on the original $1,000 retail price is a lot.
I already felt relief that I didn’t have a bill over $3,000. But when I spent less than $1,000, I felt like I was getting an absolute bargain!
At this point in my life, time is much more valuable than money. I probably could have saved a bit more if I had looked for a cheaper mechanic who didn’t specialize in my car. But the store’s Yelp reviews were great and they knew what needed to be fixed.
Here were some things to keep in mind when paying with cash instead of a credit card.
1) A lack of protection for cash payments.
Since I cannot pay by credit card or check, there is no record that I ever paid for services rendered. I could videotape myself paying them in cash, but I’m sure the store owner wouldn’t allow that. I’ve paid cash before for things that turned out not to work properly or weren’t authentic.
I ever got kidnapped in Beijing, China, and because my debit card was misused, Citibank refunded me the entire $2,000! From that moment on I wanted to pay as much as possible with a credit card.
2) You may not get a valid warranty if you pay in cash.
A guarantee against poor workmanship or a defective product is something we all deserve. My first concern when the service manager said I could pay for everything in cash was whether that meant the service would be off-the-books and therefore there would be no guarantee.
But he immediately assured me that I would receive a guarantee and a receipt. I was still hesitant that they wouldn’t back their warranty.
3) Not used to carrying a lot of cash.
The most cash I carry in my wallet is $100 since I charge everything on both my business credit card or a personal credit card. When I have a lot of cash in my possession I always get a little paranoid.
4) Possible help with tax evasion by paying in cash.
I assume the reason I can get a 25% discount is because this small business will not report the work done to the IRS. It will be ‘off the books’. The profit margin will be 100% on labor and any surcharge on the OEM part.
I don’t feel guilty paying cash at a favorite restaurant, so why should I feel guilty paying cash for car service? What a company does with its customers’ money is none of my business.
Maybe the company is just trying to save on paying credit card transaction fees. I must always assume the best in people. But the reality is that companies must do what they can to maximize profits and survive. As the pandemic has shown, times can be very tough.
5) No reward points or cash sign-up bonus.
Charged $1,004 to my Chase Freedom Unlimited Credit Card would give me a base reward of 1,004 reward points. That’s only worth $20. That’s not so great.
However, if I got a new Chase Freedom Unlimited credit card, I would get $200 free after spending $500 in three months. Therefore, I would get about $220 back.
But I’ve been doing a lot of credit card research lately and I could get the following cash back bonuses or rewards with the following cards.
Capital One Rewards Credit Cards
- Capital One Venture Rewards Credit Card: Earn a 100,000 mile bonus when you spend $20,000 within the first twelve months of your membership. Or get 50,000 bonus miles, equal to $500 in travel rewards, after you spend $3,000 on purchases within the first three months. Annual fee of $95.
I could open two credit cards and charge $500 each to pay my auto mechanic bill and get $300 in free cash. My bill would effectively drop to $700, or $50 less than paying cash. Furthermore, I would have purchase protection and a nice paper trail in case of defective service or parts.
Alternatively, since I use Beast Master for business, I can cost the repair and automatically save 25% regardless of whether I pay by cash or credit card. If I pay cash, all I have to do is withdraw the money from my business and then track the costs. If I pay with a credit card, here are a few choices as a Chase business customer for the past 10 years.
Chase business credit cards
- Chase Ink Business Cash: $750 cashback after spending $7,500 within three months of opening. There is no annual fee.
- Another good choice is the Chase Ink Business Unlimited: $750 cashback after spending $7,500 within three months of opening. 1.5% cashback on all purchases. No annual fee either.
Besides not getting the lower cash price of $700, the other downside to paying with a new credit card is that you spend 5 to 10 minutes applying for each credit card and then wait 7 to 10 days to receive the cards in the mail .
But I’m not in a hurry because the fan has been making this clicking sound for six months. Waiting a few more weeks isn’t a problem since I only drive about 4,000 miles a year.
Pay with cash or credit?
I’m curious what you would do, since the community always seems to come up with something I don’t see. Here is a summary of the three options:
1) Pay in cash. The easiest and fastest way to go. In this scenario, I get a 25% discount ($1,004 to $750) and then I get another 25% discount when I write off the car repair as a business expense. My biggest concern is that they will install the fan incorrectly or the fan will fail within 12 months and they will not honor the warranty despite my receipt.
2) Pay by credit card. The conservative person would take the safe route by opening at least a few rewards credit cards to get purchase protection and at least $300 in free cash or 30% off. The credit card sign-up bonuses would effectively make the car repair $50 cheaper than the cash route ($700 vs. $750), while also offering peace of mind.
3) Do both. Pay cash and receive a $250 discount after the job is done right. While you wait for the 1-2 hour job to be completed, spend 10 minutes opening a few credit cards with no annual fees to get at least $300 in free cash after you spend $1,000 on something else. This way I get at least $550 in savings, if not much more if I keep opening new cards after about three months.
The choice is simple
The sad reality is that I need a three year overdue service, a brake bleed service, and I also need new brake pads soon. All this costs another ~$1,500. But of course if I pay cash I get $300 off!
Ah, the costs never stop when you own a car. At least I know that when I open a new rewards credit card, I have something purposeful that needs to be charged. The last thing you should do is open a credit card and buy something you don’t need just for the rewards.
To conclude, pay in cash or by credit card
In conclusion, the debate between paying by cash or credit card is simple. In this situation, your best bet is to pay cash and get the $300 discount. Then I open a new rewards credit card to get the free money toward new car service fees.
My favorite rewards credit card is the Chase freedom without limits. To look at! There are no annual fees and you get $200 if you spend just $500 within three months of opening. The 1.5% unlimited cashback is also incredible.
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About the author
Sam worked in investment banking for 13 years at Goldman Sachs and Credit Suisse. He earned his bachelor’s degree in economics from the College of William & Mary and received his MBA from UC Berkeley. In 2012, Sam was able to retire at the age of 34, thanks in large part to his investments that now generate about $350,000 a year in income.
Financial Samurai started in 2009 and is one of the most trusted personal finance sites on the web with over 1.5 million page views per month.
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