Cash or Credit – Key Credit Repair Tips and Advice

In order to avoid debt and overspending, many Americans have moved away from credit cards and loans and instead save up cash for purchases. The thinking behind this practice is that they’ll never have to embark on any credit repair or debt management mission, as paying with cash only ensures that they’re never spending beyond their means.

Paying only with cash also ensures that consumers are paying the lowest possible price for items, as they can avoid interest rates that can make large purchases even larger in the long run.

But is paying cash for everything all the time really the right way to go about your finances? While it certainly carries some benefits, one area where this practice can hurt you is how it pertains to your credit score.

Yes, your FICO score, that three digit number that’s essential for getting approved for loans and credit cards and also for cell phone plans, employment opportunities and more. Building credit is important for a variety of reasons, and while many people may be scared off by falling into debt and having to repair credit, a favorable credit score can help you with more than just home and auto loans and credit cards.

Here’s a look at some other reasons why paying cash for everything may not be the best financial strategy:

  • Your FICO score is composed of five factors: payment history, amounts owed, length of credit history, new credit and types of credit used. If you pay cash for everything, you won’t have a credit report. And while many people are OK with this, there’s the chance of being denied for a credit line in the event of an emergency or being turned away for a job or cell phone plan. Like we mentioned earlier, your credit score is important these days for more than just loan approval and favorable interest rates.
  • You can have a credit card and be responsible. One argument for paying cash over credit is that you’ll never have to worry about spending getting out of control. But there’s another way to use a credit card and keep spending within means — by being responsible. Here’s a great credit tip to build your score and keep debt down: Make payments on time. Not only does this save on interest, but it’s also the most heavily weighed aspect of your credit score.

So while many are spurning credit cards altogether and opting for a cash-only approach, it’s possible to have the best of both worlds, so your credit score as well as your finances don’t suffer.