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December 07, 2011


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What's better than the smell of new bills?

I prefer to actually pay in credit to get an additional layer of protection. I generally use a 2% cash back card, too. But unless the warranty (and extension) is vital to my purchase I always ask if I can get 5% off if I pay in cash. You'd be surprised how many times it works. I guess that's part of my credit card strategy...

I don't have a ton of transactions, but generally I pay with credit card unless it's a small transaction (say, under $20). I don't like having little transactions on my credit card statement for one, and I like to keep a supply of change in my car for parking meters. Also, I don't like to force retailers to pay the relatively large credit card processing fees on a small purchase.

I'm the opposite when it comes to impulse shopping - if i have cash in my hand, that means its already out of my bank account, and i have already mentally spent it since its not in the balance anymore. I am much more likely to do something frivolous with it.

I've found that you really can't argue with credit card die-hards, the same way you can't argue with active-trading die-hards. It doesn't matter what statistics say, some (most?) people believe they are immune and are the exceptions to the rule. People spend more when they use their card. There is a difference between not "having your spending under control" and spending an extra 10% without noticing because you are using plastic. Don't think you do? Go all cash for 6 months and record the results. Compare them to your last 6 months of credit card statements and determine for yourself, without the guesswork. Why 6 months? It takes 1 or 2 months to get over the phenomenon Sarah mentions above, if you are accustomed to using credit cards.

I always find it funny when the same people that advocate a buy and hold index fund investment strategy (because statistics say it is best) are often the same people that use credit cards instead of cash for the rewards (even though, statistically, cash would be a better choice). Kinda like how people feel safe in cars but not airplanes. I think it is a comfort zone thing.

Des --

I think almost everyone would spend less if they went from cards to cash. But the reason isn't a spending-related one (at least completely), it's a convenience-related one IMO. Who's going to carry around $500 in cash to buy that snowblower, lawn mower, etc.? Virtually no one. So they "save" the purchase, even though they have it budgeted and want to buy.

I would say at a small business, the real advantage of using cash is that you can often times get a discount greater than what you would get using a credit card. The real trick is to deal with the owner or an empowered employee who is able to do that.

This isn't going to work at the Quicky Mart for gum, but I've had success with this on larger purchases where the store would have fallen in the basic 1% category.

"If you can't keep your spending under control, you should not be using a credit card. And you probably shouldn't be using cash either. Let your spouse do the shopping instead."

Um, not everyone has a spouse.

Not Married --

Then just take off the last sentence. This is for you:

"If you can't keep your spending under control, you should not be using a credit card. And you probably shouldn't be using cash either."

I find I spend more with cash. All that's in my wallet is a $20 bill for an emergency. It's rarely used.

I used my credit card to pay for major dental work that I didn't have the cash for. Took me many years to pay off and I did pay interest. Not all credit card interest is the result of frivolous spending.

Also, ditto @ Not Married

That was a GREAT comment Des! I agree with you. I struggle with this – for the most part my wife and I have switched over to debit card/cash because as everyone agrees, we all definitely spend more money when using credit cards than with cash or debit cards. Debit cards offer the same protection as credit cards and I still FEEL the pain of money coming out of my account (which is a GOOD thing!). We were making about $50 in credit card benefits a month… That was painful not to see this last month – but I will be interested to see if it really affects anything because I can already tell we are spending less ;-)

I prefer credit cards as they provide cash back, 60 day buyers protection, free towing, and other perks like end of the year statements to track where and how much money is being spent. I disagree with the author, I believe credit cards offer more privacy and protection from atm withdrawals and pick pocketers.

...not to mention people need credit history to buy homes and if you are good you may get the best interest rates on your mortgage saving you thousands of dollars in the long run.

I've always felt the opposite. Like Sarah, when I have cash in my wallet, it's effectively "already spent". It disappears and the next time I go to the ATM I don't have a good explanation of what I did with it.

When I use a credit card, I'll spend money on something expensive and will immediately shame me for spending more than usual on restaurants, and I have a firm record of that spending the next time I sit down to budget. I also like the idea of the money I'm spending sitting in my savings account earning an extra month's worth of interest.

This is all dependent on the "never pay interest" principle though.

Nate, I am not sure that I agree with you that debit cards offer the same protection as credit cards. Just ask anyone that paid with a debit card and had a dispute with the merchant. In the case of a debit card, the cash is gone from your account pending the resolution of the dispute and your receipt of a refund. In the case of the credit card, you do not have to pay for the merchandise until days after you receive your credit card bill (hopefully the dispute has been resolved by then). You can also dispute the charge with your credit card company if you have a legitimate complaint with the merchant and not pay that amount of your credit card bill(without penalty) until the credit card company resolves the dispute.

@Nate: "as everyone agrees, we all definitely spend more money when using credit cards than with cash or debit cards" is a gross generalization. Statistically, people spend more with a card than when they pay cash. That does NOT mean "we all definitely spend more". It means that the average person spends more.

As Seth and Sarah mentioned, some people are the opposite. I know someone very frugal who carries no cash at all because she knows that she will spend it impulsively. She uses her Discover card whenever posisble and her Visa card where Discover is not accepted.

@Des: Your statistical comparison to index funds is not relevant. Index fund investing assumes that the MARKET averages out and/or that you are not expert enough to beat it. Using cash assumes that YOU PERSONALLY are average. These are totally different concepts. Perhaps you ARE expert enough to manage your spending regardless of how you spend, but not a stock-market genius. And some other people may be brilliant investors who over-spend on credit cards.

Cash. Or debit or paypal (takes care of that Amazon issue) or ACH or bill pay.

Don't own a credit card. Figured out that game long ago. And I havn't paid interest either.

Just where do those great rewards come from? And why would a for profit company just give away awards?

Money Rule...If you can't explain it to a six year old so they understand, then you shouldn't do it.

But what do I know.

Hey Hamaca!!!

Debit cards offer the same protection (so long as they have the Visa/MasterCard logo attached to them). Do a signature purchase and not a pin purchase and you have the same protections. Note I didn’t say the same convenience. My debit card has a Visa logo. Here is an excerpt for the Visa debit card portion of their website for your review:

“Does my Visa Debit card have security protections?

Yes, when you sign for your purchases, Visa Debit card’s security protections help prevent, detect and resolve fraud in various ways:

• Visa's Zero Liability Policy, which protects you from unauthorized charges. Any funds taken from your account due to fraudulent use will be returned to you.

• Continuous fraud monitoring to detect suspicious activity on your debit card

• Access to Identity Theft Assistance to help you recover your identity and prevent further problems

• A 3-digit security code to verify your identity for Internet and phone purchases"


I prefer credit cards. I don't get any money back if I use cash. If I use my credit card, I get money back. I don't pay any interest, because I pay in full each month. This system stretches my meager dollars further than if I just used cash.

Hey Mark!

It is pretty well documented that paying with cash and (and to an admittedly slightly less effect) debit cards registers pain sensors in our brains. This source is a pretty nice read :-)

Essentially if we can come to an agreement that paying with cash does register pain from a neurological perspective, then I would ask you if it’s a generalization to assume that people don’t like pain? I guess one can find a few anomalies, but mostly it’s safe to say people don’t like pain and they also spend more money when using credit cards.

A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash. Interestingly enough, McDonald’s found that the average transaction rose from $4.50 to $7.00 when customers used credit instead of cash. The McDonald’s study represents a 47% increase just because you walked in the door and used a credit card instead of cash. That was the reason McDonald’s started accepting credit cards in the first place, they knew that people would spend more money! Very profitable generalization I would wager!

I stand wholeheartedly behind my statement that people will spend more money with credit cards than with cash. Admittedly, many people still choose the convenience of cash rewards that accompany credit card usage – nothing wrong with that at all!

Everything gets a whole lot easier when you have been retired as long as we have and already have pretty much everything you need. Other than staples like food, gas & utilities we don't have to buy much any more.
We never did have the "Impulsive" habit that seems to be endemic in the USA because, firstly we didn't grow up here, and secondly, credit cards didn't exist until much later in our life.

If something expensive that we have to have crops up, such as my wife's recent two dental implants & crowns, it just goes on the credit card, gets paid as soon as it's due and generates a nice cash back reward. One thing I do is to wait until the card I am going to use has closed for the current period before paying the bill. This gives me another month before the money actually comes out of our savings account and the payee never complains that it's a few days late.

I use cash so rarely that I never have more than about $30 in my wallet, and as for coins, I never use them.

@ Nate I agree with you only to a point and that is that people who pay with cash do not have episodes of spending more than they bring in. Other than that a spending problem is still a problem that needs to be addressed. Cash is not the cure it is a patch.

I prefer my trusty bank debit card. It is tied directly to my checking account and comes out the same hour that I use it. No fees, no interest. I agree with Sarah's comments. Money in the pocket is the same as it being spent. An all cash system is something I am doubtful would work for this household but, honestly, we haven't tried.

I mostly use a debit card. Around Christmas, I use my credit card more, and very carefully. I always pay my credit card in full.

Nate - regarding credit card studies. All of these studies looked at the whole population. None of these studies looked specifically at people who pay their balances in full every month.

An "average person" in the US carries a balance; in fact over 50% of credit card users carry balances. Given that, it's no wonder that ON THE AVERAGE you see more spending with credit cards. In fact, the fact that you only see 10-15% more spending on the average while a certain percentage of people has huge balances shows that quite a few people don't overspend.

"Spending more on the average" isn't the same as "everyone spends more". People who carry balances spend more.

@Troy "where do the rewards come from"

Where does high interest on checking account linked with some debit cards come from?

Part of it comes from the merchant fees. Yes, you may say that brings the price up, but IMHO it's the market that sets the price. If the merchants' expenses go down it's not a given that you'll get the break.

Yes, you are right, part of it comes from stupid people who pay interest - I consider it a tax on stupidity. Sorry, but I refuse to fill guilty because some people are stupid. If they want to subsidize my rewards, it's fine with me. I didn't make them buy stuff they can't afford.

@ Keith Pick the right credit card and you also have no fees and no interest + cash back and credit history. I imagine debit card is the same as cash, one difference being that you can "bounce" a debit card. What are the fees on those? I heard a story once about a person who essentially paid $37 for a cup of starbucks coffee due to having an account with insufficient funds.

@ Mark The reason credit cards can offer cash back rewards is because they charge merchants fees every time a consumer chooses "credit" on credit card purchases. Store owners are willing to pay these fees on their own goods because studies show that accepting VISA and MC payments draws more business. Typically merchants pass the increase on to the consumers. That's why you can read articles explaining how using cash costs consumers more money or "surcharges". You can either blame the credit card industry on this or do what I did...join them. :)

Hey Kittie!

I’m sorry but I’m not sure how you were countering my argument? :-) I’m sure we can agree to disagree. I approached my point of view by addressing the neurological component of spending with cash (i.e. there is some primitive instinctual “pain” when using cash that is not there when using plastic).

I’m sure that even someone (A) who pays their credit card balance in full still feels the uncomfortable cognitive pressures when paying with cash right (or are they someone immune)? And if you can agree that is true, then what does paying their credit card bill off in full every month have to do with anything? They still spent more money than if they had only used cash!! Even if it was on average (as it seems you like averages) less overspending than someone else (B) who carries a balance would. I think you missed the mark in trying to counter my point. Cheers!!

@Melissa, you say you used a credit card for payment because you didn't have the cash available. Often times, you can set up a payment arrangement. If not, its worth asking.

A friend recently had some unexpected work done and they allowed them to pay $100 / month until its paid off. Even if you may have the cash but its all of your emergency fund, why not use it when they'll essentially 0% finance you?!?

Even if you did pay for it up front, worth asking if they'll give you a discount for paying in full at time of services or something.

Hey Nate!

As before you are interpreting "people spend more on the average" as "everyone spends more" and "an average person feels congnitive pressure when paying with cash" as "everyone feels it".

1. Let's look at the numbers first. You claim that the studies that showed 10% ovespending on the average means that everyone spends more.

Let's take for example 10 people. Statistically over half of them carry balances which means that they are overspending (because they spend more than what they have). Some carry large balances which means they overspend by a lot. If 5 of these people were to overspend by 20% and 5 not overspend at all, you'll get 10% overspending on the average, but 5 people would still spend about the same. I.e. you can get the result as cited in the studies even without everyone overspending. In fact, if we take 10 people out of which only one person overspends but by a 100%, you'll still get your "10% more spending".

2. Now look at psychology. For this, I'll answer your questions.
"I’m sure that even someone (A) who pays their credit card balance in full still feels right (or are they someone immune)?"

"I am sure" - this is a supposition on your part.

Just because you feel this pressure or an "average person in the studies" felt this pressure doesn't mean everyone does. Both Sarah above and I feel that once we took money from our bank accounts, it's money already spent so why feel it? I don't even know how much cash I have now in my wallet; when it's gone I'll just get more...

Personally, when I take out my credit card I feel such pressure even more than cash because I know that I am going to see the bill for this amount and that I will need to have this amount on my checking account by the due date.

"And if you can agree that is true, then what does paying their credit card bill off in full every month have to do with anything? "

Only a person who's not had experience of paying his bills in full can ask this question. Seriously.

Having a habit to pay your bill in full at the end of the month is important: it means that when you make a purchase you have to be already aware that by the time the credit card bill is due you need to have the money ready. You need to think "do I have this money already?" "how much will I have by the due date?". I.e. if you have a habit of paying your credit card bills at the end of the month or better yet having the money automatically deducted from your checking makes you think about your purchase every time you take your credit card out. It teaches you to count money.

Even if you've forgotten to count during the first month, seeing the large bill and having to sign a check for a large amount at once will make you think twice about it next month.

Personally, I feel a "cognitive pressure" every time I look at a large credit card bill and signing a check for that large amount (or knowing it will be automatically deducted from my checking on the due date).

Nate - a question for you. Don't you have "instinctual pain" when you look at a particularly large bill and have to sign a check for a large amount?

Now think about it. Would you feel more pain paying cash for 10 small purchases or if you are looking at a large bill and have to sign a check to part with this large amount? If you have to sign this large check once during the first month of credit card use, don't you think next month you'll think about it every time you take out a credit card?

This is the main difference between paying in full and not. When you pay in full you are always thinking about the next bill.

I would never use cash only. Even when I had no cc's, I used my checking account, although this does come out of my balance (almost) immediately. And - cash is not safe. It can be stolen as quickly or more so than money from a cc or debit card. Quicker, because it is immediately spendable to the thief. As FMF says, people who carry a lot of cash have lots of worry.

I know the difference because I was once in very large cc debt (@ $32k) and it took 15 years to pay it off. I am extremely careful with my cc's. I do overspend a time or two, but I have the money available before I spend it. If I have the leeway to spend extra and have the wherewithal to spend it, I am not "over spending." I am paying for whatever I buy and on time. Gives me a great credit rating.

The best motivation I can find for not seriously over spending is that large debt we had. I am now out of debt, own my own home, a car and have savings. I do not ever intend to go into debt again. And I love those rewards. Extra spending money for me.

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