Do you think you’re a smart credit card user? Do you pay all your bills on time, carefully avoiding finance charges? According to a recent poll, 43% of us pay down our balances in full each month, but that doesn’t necessarily deserve the pat on the back we thought it did.
Recent studies reveal that those of us who use credit and debit cards to make purchases are spending much more on average than those who pay with cash. By making the switch from plastic to paper (money, that is), you could see a drop in your spending of over 12%.
Studies show credit cards make you spend more
Studies have been conducted since the early 1970’s that all reveal that credit cards encourage spending. For example, restaurant tips have been found to be larger when payment is made using a credit card. Those who spend using a credit card will spend more at a store in a single trip than those who spend cash or write a check.
An MIT study conducted by Drazen Perlec and Duncan Simester shows consumers are willing to pay more for items when they are using a credit card as opposed to cash. Participants in the study who used credit cards offered over twice as much for items in a silent auction situation as those who were spending cash.
“When you pay cash, you can feel the money leaving you,” explains financial advisor Dave Ramsey. “This is not true with credit cards. Flipping a credit card up on a counter registers nothing emotionally.”
And don’t let credit card rebates and rewards fool you into thinking using plastic is a good idea. 1% cash back, for example, is worthless if you spend 12-18% more on average by using the credit card in the first place. While there are some valid reasons to use a credit card (Wisebread does a good job of outlining a few of them here), I disagree that getting the rewards are one of them.
Cards encourage buying on impulse
We’ve all been there. You go into the store planning to purchase one or two items. You have a little cash – certainly enough for what you’re looking for – and a credit card in your wallet. Without much thought, you leave with twice as much as you intended to purchase. You still have your cash, because you used your card.
If you had simply taken the cash in the store and left your cards at home, you wouldn’t have bought the extra items at all. By taking your credit card in the store, you spent more money than you originally intended. Your credit card actually cost you money.
There are other merits to using cash for your purchases. Get Rich Slowly points out that you can often get a better deal on something when you have cash in hand. And by using cash instead of a debit card, you’ll have fewer receipts to enter in the check register and less chance of getting hit with dreaded overdraft fees.
Try this at home: The Cash-Only Experiment
Using plastic can make sticking to the family budget even harder. If you make some of your purchases with cash, some with credit, and some with debit, it’s easy to get overwhelmed trying to keep track of everything. To make staying within a budget a little easier, try this experiment: Give up credit cards for one month.
- First, start by creating a budget (if you don’t have one already) or re-evaluating an existing budget to see where you can cut expenses.
- Withdraw from the bank the total amount of cash you need each week, based on your new budget. (Don’t carry a whole month’s worth of cash in your wallet for safety reasons.)
- For four weeks, leave your credit cards at home. Use cash for all of your purchases. (Don’t even use a debit card, as that can encourage overspending as much as credit does.)
- Note that some purchases can or should only be made with a credit card. A credit card is safer, more convenient, or necessary for things like internet puchases and automatic monthly billing. It’s okay to continue using credit for such expenses, just make sure they have a place in your monthly budget.
- Once you’ve gotten in the habit of making cash your primary method of payment, start carrying one or two credit cards again for emergencies.
This experiment will most likely prove that you spend significantly less of your hard-earned income when you have to physically watch your cash leave your wallet. After one year of using paper money instead of credit, you will be in a much-improved financial position – fewer impulse purchases, a streamlined budget that’s easy to track, and zero credit card debt.
If you’ve made the switch from credit to cash, make a comment below to share your tips and experience with the rest of us!