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.