You Spend More Money When You Use A Credit Card

Many of you, including prominent personal finance bloggers, often write about using your credit card for everything during the month, then pay it off at the end of the month in full. You rack up tons of reward points and cash back bonuses, and you tell others about how you’re playing the system. But, have you ever thought that you might be spending more money than you normally would if you paid with cash? The reason that I bring this up is that I am definitely in the minority when it comes to the use of credit cards. Many of you think they are a tool if used responsibly. I think they are a trap. They lure you in to make it look like you can play the system by racking up all of the reward points, but then that ONE time you don’t pay it off in full or miss a payment, they win.

This is why I think you shouldn’t use a credit card even if you pay it off in full each month:

Drazen Prelec and Duncan Simester of the Sloan School of Management at MIT, did a study about credit cards and your spending habits. Their study found that subjects paid more when they were instructed to use a credit card rather than cash. In fact, they found that they were willing to spend up to 100% more with plastic.

Here’s the reason that I believe this study is accurate. Let’s say you go out to eat with $50 cash for you and your wife. You go into the dining experience knowing that you only have $50 to spend, so there’s no way that you can leave spending more than $50 or else you’ve got some explaining to do. Now, the same couple goes out to eat with a $50 budget, but they intend on paying with plastic. There will be NO penalty for the couple with plastic if they spend more than $50, and therefore, much more temptation to break that budget amount than the couple who came in with cash. I have done this so many times, I can’t even count them. I have spent more money on clothing, eating out, and entertainment when using plastic, because it doesn’t matter if I go over a few dollars in my budget. I won’t be rejected if I spend $100 on a night out rather than $75. I’ll rationalize it by saying we had such a great time and we hardly ever go out and do stuff like that. But, if I had gone out with $75, I would have come home spending $75.

As quoted by Dave Ramsey, “debt is the most aggressively marketed product on the planet”. This statement is 100% accurate, and I know this to be true, because credit card companies have convinced very smart people that they can get something for nothing. There are tons of you out there that are very savvy, intelligent consumers and you are grinning every time you get $3 cash back on a $100 purchase that you won’t pay interest on. But, could that $100 purchase have been $80 if you had brought cash? Now you’ve spent $20 more in order to receive $3 cash back.

I know that many of you will still vehemently disagree with me on this one. You’ll swear up and down that this doesn’t happen to you. The only thing that I ask from you is to honestly analyze whether it’s worth it to use credit cards. Will it really impair your life that much to give them up? Be honest with yourself and be conscious next time you go out to eat and use plastic. Try to identify if there is any temptation to spend more than you want to spend, because you know that $10 more won’t break your bank at the end of the month. Do that, and if there’s still no temptation, then come yell at me and tell me how much of an idiot I am for not getting 3% cash back on a credit card.

  • J

    You’ve written a long diatribe that is simply about general lack of discipline.

    If you lack discipline, you should cut up all your credit cards, and then get cracking on all the other costs associated with your lack of discipline.

    If you don’t, then you can continue to use credit cards responsibly, as I have for the last 25+ years. I’ve never carried a balance, I’ve never had a late payment, and I’ve never really given too much thought to rewards.

    A credit card is a convenient financial tool that I am adult enough to use responsibly.

    Case closed.

  • lulugal11

    In general some people may tend to spend more…but I think you are overlooking those of us who DO have the discipline to stick to the budget.

    If I budget $20 for food then I spend $20 using my card because I treat it like cash.

    You make a valid point about people who sometimes go over….but please do not ignore those of us who stick to the budget and do not spend extra just to get cash back.

  • Jacquelyn Hart-McCoy

    I do not think you are an idiot in any way, I don’t even think you are wrong, I think this is a very individualistic thing. For some the issues you have stated may be a big problem. For others it may not affect them at all. I do not think this is an all or nothing type of issue. I will never stop using credit cards. I pay all my bills on them and have for over 3 years. I have never paid late or not paid in full. I have gotten over $2000 cash back in the past three years. So lets say I did miss a payment and had to pay a penality, I still would be way ahead of the game. I have a budget and I stick to it, whether I am paying cash or credit. In fact the cc statements actually let me identify our spending leaks more easily so we can fix them each month. That being said, I do think there are some who can not use a cc wisely and therefore stay away from them. You need to figure out what kind of person you are and act accordingly. For me, the cc is just an added bonus to my life. For some, I know it causes many stressful issues.

  • Bill

    I totally agree with you. Credit cards are a trap. And yes, you can get “cash back” and you can earn “miles”. And those seem like good incentives.

    I know this first hand, because I’ve fallen into the trap of using my cards for everything so I could “earn” all of these goodies. Sure, over the past 10 years, I’ve earned over 193,000 miles on my Amex Membership Rewards, which means that I SPENT AT LEAST $193,000 on my Amex alone!

    And guess what? Those 193,000 miles AREN’T EVEN ENOUGH to get 2 of the CHEAPEST REWARDS ROUNDTRIP TICKETS on Delta from New York City to Rome. Each ticket will cost me 100,000 miles! PLUS, $41.36 in Taxes/Fees for each ticket.

    And the CHEAPTEST PAID ROUNDTRIP TICKET on Delta from New York City to Rome on that same exact flight is $1,107.

    That means, that for the $100,000 it cost me to get the 100,000 miles I needed to get this Rewards Ticket, I only earned $1,107. That’s a Return on Investment of ONLY 1.107%!

    Now, some people may look at it as if I SAVED $1,107 on this ticket.
    But I see it as I MADE ONLY 1.107% on the money I spent/invested. Oh yeah, I bought stuff with that money. But this return on investment is terrible.

    Great blog. Keep posting.

  • Chris

    I used to consider myself an expert on credit card rewards. I got free flights and cash back all the time. I patted myself on the back because I thought I was beating the system by paying off my credit card balance each month. But one thing that I did not consider was the negotiating power of cash. At the mall last week, I saved 26% on a pair of sunglasses simply because I used cash and had the gumption to ask. You just can’t do that with a credit card. You won’t always get a good deal, but over time, you’ll save more money by negotiating with cash than you would with any credit card rewards. I shredded my last credit card over a year ago.

  • mbhunter

    I’m one of those PF bloggers that puts everything on my card and I’m sure you have a point. I haven’t missed a payment but I agree that there is the tendency to spend more doing everything on credit.

    I’m adding you to my blogroll. Glad I ran across your blog!

    • Amy Livingston

      I’m not convinced of this at all. I am suspicious of the oft-cited studies that “prove” people spend more when paying with credit, because I know that I don’t usually decide how to pay until *after* I get up to the register and see how much I owe. Then I tend to choose cash for a smaller bill, credit for a larger one. So yes, I pay more when I’m using credit, but I’m not paying more *because* I’m using credit. I know of at least one study that controlled for this by instructing participants ahead of time whether to use cash or credit to pay for their lunch–and it had no impact at all on their spending. (Actually, they spent slightly more with cash, but not a statistically significant amount more.) But you can’t find this study anywhere anymore, because no matter how narrowly you try to tailor your Google search, all you get is “Studies consistently PROVE people pay more with credit! No exceptions! Not one!”

  • Bob

    Another thing that we over spend on is the tips we leave when using credit cards. When I review my tip reports for employees daily I find that credit tip are 25% or more.
    Some may say this means my employees are giving great service but also how much is it people just rounding up to get a even dollar amount to make balancing their statement easier?

  • ekrabs

    Well, let me qualify outright that I pay everything on my card.

    That said, perhaps I am the one in the minority in that I don’t THINK I over-spend anyway.

    The reason why is because I usually follow my budget strictly. In other words, by the time I get paid, all of my money is already budgeted away, and for example, I know how much money is set aside to buying groceries.

    If the concept seems a bit fishy, it’s because I first started this system with envelopes and cash. So, you can imagine that when I got paid, I converted my paycheck to cash, then stuffed the allocated funds into each envelopes. As I go to the grocery store, I only take the grocery envelope with me.

    Eventually, I moved on to the computer to track all of my expenses, but the system remained because I am so used to it. I also switched to a credit card rather than cash, well, mostly because I got a job that had direct deposit. However, because my budgeting system is still in place, I don’t overspend.

    In a long about sort of way, I agree that credit card can be a trap. Even for those who pay off the balance very month. And the reason is because, unlike an enveloped filled with cash, it’s not as easy to keep track of your cash flow through credit cards.

    So, to me, the question really comes down to your ability to track your cash flow and your budget discipline. If you have these two aspects in place and humming along nicely, you shouldn’t have much problem with credits cards, as they are merely a means of transaction. If not, well, you can easily over-spend.

  • author

    Ekrabs, it’s a good debate. I am not claiming that everyone who uses their credit card for everything is overspending. some people are great at having a number in their head and sticking to it no matter if they use cash or plastic. My wife is one of those people.

    You said it well, they are a trap.

  • Amy Livingston

    Yes, that looks like it. I remember the study in question was done at Carnegie Mellon.