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Is it Time for Cash to Make a Comeback?

Written by Guest Contributor - 49 Comments

This is a guest post from Kevin Mercadante of Out of Your Rut. Kevin is also author of Lighten Your Load, an e-book focused on reducing living expenses while still maintaining a comfortable lifestyle.

Credit limits are cut. Interest rates are increased to 29.9% after just one missed payment. Rewards programs are reduced and perks eliminated. Credit card “agreements” are now dozens of pages long, and written in some language you can almost decipher, but you’re pretty sure it isn’t English. $39 overdraft fees have become the new standard on checking accounts. And now the darker side of debit cards has started to emerge.

Do you ever feel the desire to somehow fight back, to say I’m done playing this game? Well, maybe there’s a way…

How did we get to this point?

In Five Secrets Your Bank Doesn’t Want You to Know (Yahoo! Finance, August 5th), Laura Rowley writes:

“Banks are squeezing customers with historically high fees and penalties, from overdraft charges to account service fees to new surcharges on foreign debit transactions…

Last year, overdraft and insufficient-funds charges totaled nearly $35 billion and comprised about 90 percent of banks’ consumer-fee income, according to a study by the consulting firm Bretton Woods Inc. Three-quarters of banks automatically enroll consumers in their “overdraft protection” programs without formal permission, and more than half of banks manipulate the order in which checks are cleared to trigger multiple overdraft fees, according to a Federal Deposit Insurance Corporation study.”

Increased fees and restrictions aren’t a figment of our imaginations, but we’ve all gotten so comfortable with the way things are that we pay these fees, complain to our friends and neighbors about it -— or sound off on weblogs —- and then… We continue to pay them. As long as we keep this up, banks won’t have to court us as customers, and we’ll get what we richly deserve.

I’d like to suggest that the best way to fight back against the relentless skimming of our financial accounts is to limit their use. While it isn’t practical to completely eliminate banks from your life and still be fully functional in the modern world, we certainly can reduce our usage, and therefore our exposure to the increased fees, interest rates, and restrictions.

Cash on the barrel

Talk about using cash, and you get the usual litany of drawbacks: there’s no buyer protection on purchases, you won’t earn credit card rewards, if it’s stolen you can’t get it back, “I’m not comfortable carrying around hundreds of dollars,” and so on. All of these objections have some merit, but I’d also suggest that none are insurmountable.

In fact, by accepting total reliance on bank cards, you’re accept a different set of risks. It’s unfortunate, but there will be advantages and drawbacks no matter how you proceed, which is why it’s never in our best interest to take any one method off the table entirely.

The advantages of paying with cash:

  • You will never pay more than you can afford for anything, the way you do when you pay with credit. In other words, no more month-end spending hangovers.
  • You will be more likely to stay on budget; studies have shown people will spend more if they pay by credit card than by cash.
  • Though you can lose your cash to theft, your loss will be limited to the amount of cash you had with you. But there is zero chance of identity theft because cash carries no record of you.
  • With credit and debit cards, a paper trail is created each and every time you have a transaction, so paper with identifying information—often including your signature—is floating around all over the globe. There is no paper trail with cash, other than the receipt, which will be in your possession.
  • Cash is the ultimate form of financial simplicity. You pay and you go, and there’s no chance that additional charges can be added to your bill after the fact. There are no “gotcha provisions” with cash as there are with credit cards.
  • Privacy. When I was in the mortgage business, people were often hesitant to turn bank statements over to us because there was a record of their every move showing up; where privacy is the issue, cash is the best transaction method by far.

A happy medium

By creating a tiered spending system, we can minimize reliance on bank cards without eliminating them entirely.

Consider using cash for routine purchases, especially for anything under $100, where most transactions fall. Is it really worth incurring transaction fees, or risking overdraft/overlimit charges or identity theft in exchange for the convenience of being able to swipe a card for a $3 cup of coffee?

Use debit cards for purchases in excess of $100, which will also minimize the amount of cash you need to carry. An exception is gas purchases, since there’s a major advantage to swiping a card at the pump as opposed to abandoning your car to pay a store clerk for an undetermined advance purchase.

Finally, restrict credit cards to an only-as-needed basis. This would include major purchases where buyer protection is advisable, or airline tickets if your card offers travel insurance.

What ever combination you settle on, the important thing is to come up with a mix that will reduce your reliance on both credit and debit cards, and the fees, high interest, and other restrictions that come with them.

You thoughts

How do you feel about switching to cash for your everyday purchases? Are you for it or against it? Why or why not?

Published on December 2nd, 2009 - 49 Comments
Filed under: Banking, Credit Cards

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49 Responses to “Is it Time for Cash to Make a Comeback?”

  1. 1
    cemccon Says:

    If only we could get Mint.com to track our cash purchases…
    On another note, I wonder if the US Government won’t someday soon outlaw cash altogether … no more underground economies that can’t be taxed.

  2. 2
    Kevin@OutOfYourRut Says:

    Cemccon–There’s always a possibility of cash being outlawed, but it’s probably doubtful.

    There’s a large section of the population, largely invisible from the suburbs, who don’t have bank relationships. To eliminate cash would have a negative impact on this group, and a major hit to the economy if so many people are shut out of it. Politically, it doesn’t seem like it’ll fly.

  3. 3
    Financial Samurai Says:

    Nobody likes to spend cash. I know that if I had to bring a bag with 450, $100 dollar bills ($45K) to buy this car I’ve been eyeing, I’d probably stop immediately!

    Alas, I can just write a cashier’s check, and be done with it.

  4. 4
    Alexandra Says:

    I won’t give up my credit card rewards. And the ease of tracking my money by simply looking at my credit card statement.

    All the pitfalls listed in this article apply to people who can’t manage their money well. It’s seems pretty simple: Spend within your means. Pay for everything on your credit card. Pay your credit card bill, in full, on time, every month. Automate it if you have to. Reap the rewards.

  5. 5
    Michelle Says:

    Maybe it’s a generational thing (I’m 26), but if have cash, I spend it. For some reason, it feels less real to me than my debit card. Maybe it’s because all of my finances are organized on my computer, and updated automatically. When I spend with my debit card, it automatically shows up on my check register (which is a spreadsheet) and I know exactly how much and where it was spent. Cash just seems to slip out of my hands with no accountability. But I’ve never really used cash, my first bank account (10 years ago) had a debit card and that’s how I learned about money management.

  6. 6
    Bodark Says:

    Personally I am aligned with Alexandra (use your CC, pay in full)… BUT – Folding Money is always nice, especially on a date, an afternoon at the track or something else your mother wouldn’t want you to partake in.

  7. 7
    Austin Says:

    My Two Dollars recently posted an article about the opposing viewpoint!

    http://www.mytwodollars.com/20.....f-finance/

  8. 8
    Daniel Says:

    Credit cards are definitely more convenient, plus you can track all of your expenses. Also, one of the reasons I hate carrying around cash is that I end up with coins, and that drives me crazy. They end up scattered all over my apartment.

  9. 9
    Des Says:

    I used to feel like Alexandra and Michelle – I liked the rewards, paid my bill in full every month, and spent cash like it was candy when I had it. Then DH and I tried cash-only. The first pay period was a disaster – I spent it all in the first week and had nothing the second week. That was the last time that happened! The pain of being out of money was enough to make me more reluctant to spend it the next pay period.

    Just try it for a couple months. Our credit card bill was between 1400 and 1700 a month, including all our bills. Now those bills (which amount to $410 a month) autopay from my checking account, and we spend $200 a month in misc. That means switching to cash is saving us about $1,000 a month – rewards can’t get anywhere NEAR that!

    Everyone thinks they’re the exception, but studies show we spend more when we swipe a card. Rewards can’t make up for extra spending.

  10. 10
    Kevin@OutOfYourRut Says:

    DES (9)–that’s one of the main points of the post, we spend more when we use plastic.

    The other major point that some of the commentors are missing, is the cost of plastic. None of what they provide is free, and the fees have been going up in recent years. What do we do about that?

  11. 11
    Tamara Says:

    I agree with a lot of things that are said here. I prefer to use credit cards or cash. Since I paid off my credit card debt, I have made sure to pay off what I put on the card every month. I don’t like to carry too much cash at once. And I mistrust debit cards, due to the immediate effect it allows merchants to have on my bank balance, i.e. holds or erroneous transactions.

    For a while, I used my credit card for just about everything, because it was easier to track in Quicken and Mint than cash. Lately, I switched back to cash for small transactions, trying to keep myself to a certain amount of cash per week. Like others, I feel tempted to spend cash more, and it’s harder to track, but I decided it was easier than trying to reconcile all the small transactions on my card.

    Just this past month, I’ve been using a new piece of software to track my finances called MoneyWell. It’s based on the envelope system of budgeting, where you divide up your paycheck into envelopes and then only spend what’s in the envelopes. In MoneyWell, the envelopes are a virtual layer on top of your accounts. So out of the money I have available, I can see how much I allotted for certain categories and see that balance reduce immediately as I enter transactions. I’ve also been tracking my cash transactions using iPhone apps and importing to MoneyWell daily.

    I mention MoneyWell because I do think there is a lot of truth to Des’s comment #9. Even knowing that I have to pay off the card at the end of the month, and I do, it may well be true that I would spend less not using the card. I’m hoping that the immediate feedback of the way MoneyWell presents this information will inspire me to spend less, while keeping the convenience and rewards of a card.

  12. 12
    Bryan Says:

    Kevin-

    I think you’re over-estimating the costs of plastic and missing a big benefit. There are many cards available that have 0 annual fees, with free rewards, and IF you pay on time in full every month(which you can automate) there are no late fees or finance charges. The only time you incur fees aside from choosing a card with annual fees, is when you mess up and don’t pay on time or don’t pay the entire bill. Also, if paying in full, on time, always…the APR doesn’t really matter because you won’t incur interest but get a free 30 days worth of interest on the cash sitting in your bank until the bill comes instead of being in the merchants hands at the time of purchase.

    As to spending more on plastic, I don’t doubt the research, but that isn’t everyone. There are many people I know that treat credit/debit more closely than cash and it is easier to keep track of what you are spending on rather than waking up 1 week into a cash only month saying what happened to all my money. (Although I once met a cashier at the grocery store who was asking about credit cards because she wanted one because her debit card only let her spend what she had!)

    The big benefit of credit that you’re post is ignoring is credit score. This determines what sort of rates you can get on mortgages and loans(I doubt there’s anyone on this site that can buy a home in cash). 30% of your credit score is determined by your credit ratio (debt vs. available credit). Another 35% is determined by your payment history. Another 15% is the length of your history. Another 10% is the diversity of your credit sources(loans, mortgages, credit cards). Without plastic, you will lose tens of thousands of dollars or more just on the purchase of your home by having a credit score/history that doesn’t get you the best rates(if its even high enough to approve you for the loan/mortgage).

  13. 13
    cemccon Says:

    Another thing to consider, is that Banks have figured out our (I.E., those who pay in full every month, are never late, over the limit, etc) ‘tricks’. I would expect to see annual fees become commonplace. The only way to avoid that type of fee is to close that credit card. If all banks did that to all of their cards, the only escape would be to revert to cash / check / debit. Look for more checking account / debit card fees. The end of free banking services is near.

  14. 14
    Kevin@OutOfYourRut Says:

    Cemccon (13)–”The end of free banking services is near.”–that’s an important point. It’s a progressive situation–banks that didn’t charge fees will, and banks that do charge, will charge more. So do we pay and smile, or vote with our feet?

    Brian (12)–My recommendation for cash was for purchases under $100, not for buying big ticket items like houses or cars–we’re not using plastic for those either. (But think about our bargaining positions if we could negotiate from the strength of a mountain of cash!) More to the point, do we want to risk identity theft or a bank charge over a $3 swipe of a bank card?

    We may be comfortable now because we have a card with no fees, but it’s best to be prepared for changing circumstances. It’s being repored that this Christmas will see more sales on debit cards than on credit cards for the first time ever. Change is a constant.

  15. 15
    Eric Says:

    Err…nice idea but no thanks :)

    I like the protection and benefits on my card. Plus my habits of tracking spending and paying in full maximize the convenience and add rewards too. CC FTW :D

  16. 16
    laura Says:

    “Banks are squeezing customers with historically high fees and penalties, from overdraft charges to account service fees to new surcharges on foreign debit transactions…

    I don’t like that people are getting so upset at banks for charging such high fees for overdrafts. the way the current system works is if you don’t keep track of your money and you screw up, you pay! those of us who have had maybe 2 overdraft charges in the last 20+ years get free banking. Now the people who aren’t as reponsible with their money (inadvertently or not) get to skate easier (not completely) and those who are responsible have to pay more. (Banks will raise other fees to make up for the shortfall). That’s not right.

    Too bad you have to pay a high fee for borrowing money. those are the consequences of your actions! If you don’t want to pay the fee, then be more responsible! (Yes, I know sometimes it’s an accident, but it was still preventable.) No one is forcing you to make mistakes. It’s not fair to me who is so careful with money that now i will have to pay more for banking because of people who aren’t as responsbile with their money. I’m just saying.

  17. 17
    Joanna Says:

    I switched to a weekly cash allotment for most of my everyday purchases. I’m much less likely to say okay to getting a second coffee or going out to lunch when I know that my cash will be used for something else later in the week.

    I put all of my recurring monthly charges (internet, cell phone, etc.) on my rewards credit card. That way I still earn rewards but only on items that are strictly budgeted. I still end up using a debit or credit card for unplanned-for expenses, but I am more aware of what I’m using my cards for.

    Using cards for everything and paying off at the end of the month might be a good method for some people, but I have found that cash has really limited my impulse purchases and keeps a safety net between me and overdraft charges.

  18. 18
    Tmoney Says:

    I only use credit cards. I get rewards and pay off every month. No fees, no interest. I see no advantage to carrying cash except if traveling to tip people.

    I guess if you want to go ‘off the grid’ cash would be the way to do it. Credit cards are the way to go. If you have fees and/or interest then you have not done your homework and should not go this route but with just a tiny bit of effort, credit cards end up paying you.

  19. 19
    Kevin@OutOfYourRut Says:

    So far everyone who has weighed in as being in favor of credit cards are people who pay off the balances monthly. It would be interesting to hear from people who have balances–statistically, that’s most credit card holders, approx 70% I believe.

    Since this post was written for an “average” audience, are there any readers who have balances (that they’ll admit to!) who might be willing to comment?

    I suspect that if you’re the more typical credit card user who carries a balance, you’re paying fees and interest. What do any of you think about going to partial cash to work around this???

  20. 20
    Courtney Says:

    Cemccon (13)– ”The end of free banking services is near.” I don’t know if I agree with that. I’ve heard several pundits saying that once the new cc regulations go into effect next year, banks won’t be able to make as much money off of fees and interest rate hikes on their less responsible customers, and will instead focus on encouraging their stellar customers to spend more (in order to make more revenue on merchant fees). You don’t do that by instituting annual fees and cutting back on rewards.

  21. 21
    Edwin Says:

    Unfortunately, the way I see this situation is that the irresponsible people will continue being hit by arbitrary fees to make the banks some more money. Even the responsible ones will start taking a hit in the form of annual fees and the like.

    Reward usage will go down (for me at least, and I suspect for many others) due to pointless fees and limitations, but I’m willing to take that hit if it means the banks are doing even a little less to screw everyone else over. I doubt an organized boycott of any sort would really help the case against banks. It will have a to be a slow process where consumers banking habits change over time with changes in financial literacy and banking regulation.

  22. 22
    Nickel Says:

    @Kevin: You should know by now that FCN readers are all above average. :)

  23. 23
    Honey Says:

    I have three credit cards. One has a balance that I accrued during graduate school and that I am now paying off (less than $4k to go!). One has a balance that my boyfriend transferred to my card (he accrued his during graduate school, too, and we drew up a contract where he agreed to make all the payments and to transfer the money off my card completely any time I said so). Both of these cards are strictly being paid off – no new purchases.

    The third card has only a $1K limit and I use it to charge things throughout the month and it gets paid off in full. Sometimes I do use my debit card for things but not very often (usually if I need to get cash). This is a rewards card and I also use it if I need to buy something for work where I know I’m getting reimbursed. I withdraw $40 in cash per pay period and sometimes don’t even go through it all and end up withdrawing money every other pay period.

    I bring my own breakfast and lunch to work, cook dinner at home, don’t drink coffee, etc. So I don’t have any of those tiny daily purchases – mostly I only end up spending any money at all on the weekend, and then it’s for something planned (i.e., a trip to the grocery store).

  24. 24
    Kevin@OutOfYourRut Says:

    Nickel–”22.@Kevin: You should know by now that FCN readers are all above average.”

    THANKS–I’m one of those readers ;-)

  25. 25
    John DeFlumeri Jr Says:

    The only exception is you can still pay or buy more than you can afford even with cash, if that cash was supposed to pay for something else instead.

    John DeFlumeri Jr

  26. 26
    Noadi Says:

    I rarely carry more than $20 in cash on me at a time. If my wallet is stolen or lost I’m only out that small amount, I can cancel my debit cards and go on with my life. All the banks I do business with offer the same protection on debit cards as credit cards (would never get a debit card that didn’t).

    I don’t have a credit card and never have. While it’s possible to be responsible with one, I just don’t see the point. Rewards just aren’t attractive enough a reason for me to use one.

  27. 27
    John Says:

    I have carried a balance on a CC since 2002 while I was in college. Right now I am paying no interest on any of my balances. My total CC balances are right at $10,000. In February one of the promotions will expire and about $7000 will be charged about 6% interest.

    I will continue to use credit cards for common purchases along with cash. Both are useful in different situations.

    I used credit cards to help generate a larger down payment on my recent home purchase. This will reduce my mortgage cost over the life of the loan. Well over $1000 per month is dedicated to savings or debt paydown right now. I would have preferred to wait a year before buying the house but I was able to qualify for the $8k tax credit now. I didn’t want to take the chance they wouldn’t extend it.

  28. 28
    JerryB Says:

    I stopped using my CCs cold when I finally decided to get out of debt. Now that they are both paid off, I use them regularly for my budgeted purchases and pay them off in full at the end of the month. For non-budget items I agonize over them and only buy when I have the cash to do so, even if I do make the purchase with a CC. Which reminds me, I need to pay my FNB CC bill.

    There is no one perfect system. What works for one person doesn’t always work for another.

  29. 29
    Kevin@OutOfYourRut Says:

    JerryB (28)–”There is no perfect system”–I agree completely. That’s why I recommended a blended approach in the last part of the post.

    Contratulations on paying off your debt!

  30. 30
    Chris Says:

    I also challenge the notion that all people who use cards spend more than when using cash.
    Yes, statistically people spend more, but also 95% of Americans don’t save enough for retirement and 97% do not systematically pay extra on their mortgage.

    How does one confirm that they really are in the small percentile that doesn’t overspend with credit cards? To start, I usually tell people that if they have ever paid any interest to a credit card in the past couple years, then they don’t qualify to use one properly.

  31. 31
    Nickel Says:

    The issue of spending more with credit cards is an interesting one. I’ve actually looked for data to back this up and haven’t found anything. There are lots of second hand references to “studies” that show this to be true, but I haven’t been able to find the actual studies. I haven’t looked in awhile, so maybe there’s now something out there floating around, but my current opinion is that this “fact” is a bit overblown. Rather, I think it’s highly likely to vary from person to person.

  32. 32
    Kevin@OutOfYourRut Says:

    Nickel, in answer to your question…

    Study: Credit Cards Cause More Spending
    http://www.livescience.com/cul.....redit.html

    Why We Spend More Using Credit Versus Cash
    http://www.npr.org/templates/s.....d=92178034

    The Truth About Credit Card Debt
    http://www.daveramsey.com/arti.....card-debt/

  33. 33
    Nickel Says:

    Kevin: That Ramsey link is exactly the sort of thing that I’m talking about… He doesn’t provide a shred of evidence to back up his claim. In fact, you see that same 47% number trumpeted all around the web, and nobody ever cites and authoritative source.

    The others look promising, though. NPR links an interview with an actual economist — I’ll have to listen and see if he’s done any research on the matter, or if he’s just repeating the same stuff that everyone else does.

    As for the LiveScience article, they at least say where they got the info (Sept ‘08 issue of Journal of Experimental Psychology: Applied) so I can at least read it myself, and also get a toehold in the literature (see who they cite, see who has cited them in the since).

  34. 34
    Kevin@OutOfYourRut Says:

    Ramsey cites a study by McDonalds. As the largest fast food chain in the world, and more important as an accepter of credit cards, I’d consider that to be as authoritative as it gets.

  35. 35
    Nickel Says:

    Kevin: Ramsey says that a study says that. I’m not trying to be difficult here, but I’d actually like to read and evaluate the results myself. That’s all I’m saying.

  36. 36
    MikeS Says:

    But the issue there Kevin is that people spend more at McDonalds when they pay with credit cards. You then would have to extroplate that to all spending and say the same pattern holds. That’s a big stretch in my opinion.

    It maybe true that I spend more using my credit card, than I would if I used cash. However, the time and gas of going back and forth to the ATM and the inability to see exactly where my money is going will cause me to stick with my credit card.

  37. 37
    Edwin Says:

    I also agree those studies listed are just not conclusive enough. Here’s a list of problems I see with the studies:

    The one on livescience.com:

    (disclaimer, I did not read the full study just the excerpts in this article). This study is the most solid. The problem I have is that it’s not in a near real world environment. A much better way to organize the first experiment (although more costly) would be to do it at a real restaurant and take data from the customers including their income, cash on hand, number of credit cards, and credit limit and then see whether they spend cash or use a credit card. This way you can do something akin of a regression study to see if there is any correlation between any of those.

    Even changing up the experiment slightly would yield better results. Rather than having each of the 114 people compare cash vs. credit, have them only have one form of payment and give their response. People could be using their personal preferences when answering the questions, for example thinking “well I carry $25 cash with me so I won’t be able to pay as much with it”.

    I don’t think the third and fourth experiments are useful at all for the question of cash vs. credit cards. Gift certificates have too many different features from credit cards (people might want to get rid of the whole thing at once rather than hold on to it for example).

    The NPR interview:

    This economist pretty much mirrors the conclusion I would come to based just on people’s behaviors. The problem here is it’s just not empirical data.

    The Ramsey Article:

    MikeS brings up a problem with using a McDonald’s study. It’s a very specific example with specific attributes associated (fast food, certain demographics, etc.) which makes it’s lack of experimental control too unreliable. So while this research is great for Mcdonalds, it’s not something I would base an empirical conclusion off of.

    While I think these are all flawed in some way. I also think you can make a fairly accurate conclusion that people spend more using credit cards than using cash based on both reasoning as the economist did, and fairly loose experiments.

  38. 38
    John Says:

    I use both cash and credit based on the situation. Quite often the situation that leads me to use a credit card is simply that the purchase is larger and I don’t want to deplete my cash on hand. Cash is more convenient and less risky for small purchases while credit has more safety built in for larger items.

    When I eat at McD’s I usually pay with credit, but if I go back to the counter and grab a sundae for a dollar after the meal I use cash.

  39. 39
    Kevin@OutOfYourRut Says:

    Not to paint with a broad brush here, but I’ve heard of people spending more with credit than with cash many, many (!) times. I have yet to hear of a single claim or study saying people spend more when the buy with cash than they do with credit cards. Why does no one even dare to make that claim? I think we all know why.

    But here’s a question for anyone who doubts that people spend more with credit than with cash: Why do retailers offer their own credit cards?

    The answer I got on this in my marketing courses in college was loud and clear: to generate more sales!

  40. 40
    Nickel Says:

    Kevin, I’ve never done a side-by-side comparison, but I can say that anecdotally, I spend quite freely when I have cash in my pocket, less so when I don’t. As for why retailers offer their own cards, I don’t think it’s as much about the sales as it is about keeping the interest payments for themselves, and also reducing the processing fees.

  41. 41
    Edwin Says:

    Kevin, you are totally right. It’s just one of those “common knowledge” things that people spend more with credit cards, and I agree that retailer’s books will show it to be true.

    What I’m trying to point out with the explanation of what I find to be flawed studies is that although they try to get to the conclusion that “people spend more with credit cards than cash”, they ignore the reasons.

    So far I have yet to see a study that can really answer the “why” in the conclusion that people spend more with credit cards.

    While this question is not extremely relevant for retailers, I think it’s relevant when discussing personal finances. It’s necessarily accurate to just take a handful of studies or any “evidence” I’ve seen out there and apply it directly to a PF situation for individuals.

    We can’t just assume that if someone is spending more with a credit card, it is necessarily bad and irresponsible. As comments on this article have shown, people find their own uses and habits when it comes to payments for minor goods.

    I think whether someone uses cash or credit for everyday purchases is based on preference. Of course this doesn’t put cash and credit cards on the same footing.

    As stated in this article, there are advantages and disadvantages to both. It just happens to be that cash has a bigger list of advantages because there is no possibility of being screwed by banking fees.

    My take on it is that cash is the way to go if you want to take the Dave Ramsey approach of giving someone something simple to go by so they have little chance of messing it up. If someone knows what they are doing (not the average consumer) then they are safer making the journey into a cash / credit / debit mix.

  42. 42
    Kevin@OutOfYourRut Says:

    Edwin–You’re raising excellent points. But I think we’re all overcomplicating a question that’s really pretty simple.

    Why do people spend more with credit cards than with cash? Because they can! We don’t need studies to back that up.

    The whole construct of credit cards is based on the ability to spend tomorrows income today. That’s very appealing to consumers who want it all now. Merchants know it, credit card companies know it, and that’s why they offer them.

  43. 43
    Chris Says:

    I believe I read somewhere that the ‘pain’ caused by releasing cash or breaking a fresh Jackson is greater than swiping a card.

    That aside, I agree that the majority of consumers will overspend when using credit cards. In my case, my card yields 2% cash back on all purchases. In order to justify my credit card usage I have to prove to myself that I do not overspend by more than 2%.

  44. 44
    Wojciech Kulicki Says:

    I’ve gone the all-cash route before, and I’ve also gone the all-credit route. As you point out, I think the long-term solution is somewhere between the two.

    We loved the imposed self-control that cash gave us. We knew exactly what we had to spend for the week, and that was that.

    But there were also drawbacks like the inability to budget for non-weekly expenses very well, so we eventually went back to cards.

    Now we are thinking about putting all of our “variable monthly” expenses back on cash–like groceries, gas, and home goods, because they are what really needs to be controlled in our budget.

  45. 45
    Wojciech Kulicki Says:

    @Nickel – Kitty and Adam Baker had some interesting comments and references to studies re: spending more on credit in this GRS post:

    http://www.getrichslowly.org/b.....is-effect/

    You’ll have to scroll to comments #31, 48 in particular.

  46. 46
    Paul Says:

    We have been using cash to pay for groceries, gas and ‘blow’ money since 2005. Automatic deduction for ‘all’ expenses from our checking account. Use of a credit card when renting a car, hotel reservation or purchasing something on line. We use a monthly budget. An ‘emergency fund’. No debt. I attribute all this to ‘watching’ hard CASH leaving my hand! Reward points for using a card to me is all a gimmick to spend more. Been there, done that! We all find what works for us . . . . for me it’s CASH! If I don’t have it, can’t spend it! No need to check my monthly statements to verify my charges – keeping track of checking account on line is enough! For us, we did spend more when using our credit cards – that’s all the research I need to verify!

  47. 47
    Kevin@OutOfYourRut Says:

    Paul, that’s an excellent example of the balance between the different payment methods I was going for. Cash for ordinary expenses–cuts the banks out and gives us more control of the day to day without pushing us into debt, and credit cards mostly only where necessary.

    Wish I’d interviewed you and your wife before writing this post, sometimes a “live” subject has more relevancy.

  48. 48
    Mitch Says:

    At this point I only have one real credit card, my platinum business American Express. I use my debit cards as my credit cards and my cash, and all is right with the world. I’ve gotten rid of all my other cards except one, as I don’t believe in the “keep your stupid card because of stupid credit scores” lies many financial “experts” give you. You can’t spend what you don’t have, and my life is easily much simpler.

    If you’re allowing banks and lenders to push you around with ever increasing credit card interest rates, that’s on you and you have nothing to complain about. Fight back, stand up for yourself, and don’t take that stuff.

  49. 49
    Kevin@OutOfYourRut Says:

    Mitch – Amen! You’ve summarized my point exactly. We don’t need to completely eliminate credit cards from our lives, but we should reduce our usage as a way of letting the banks know we demand to be treated as customers and not as loyal subjects!

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