Another Reason to Get Rid of Credit Cards

CNN Money provides another reason to get rid of credit cards, even if you pay off all your cards at the end of the month and never carry a balance. The reason: people spend more when they shop with credit cards:

Even if you faithfully pay your bills in full every month – and you do, don’t you? – you can profit by kicking the plastic habit, and here’s why. Studies find that paying with a card turns you into a different shopper, one who is less price sensitive and more extravagant. Forgo credit cards and you’ll run up a smaller tab when you shop, plain and simple.

Credit Cards are also getting much more onerous and companies that offer them much less forgiving. Even if you have been using a card for years and paying off the balance on time each and every month, one late payment is enough to incur both fees and significantly higher interest:

A study last year by Consumer Action found that late-payment fees had gone from an average of $13 in 1995 to $28 in 2007. The highest is $39. One tardy payment, even by a few hours, and you can get slapped with a penalty interest rate as high as 32%.

Even if you NEVER EVER make a late payment, even by a few hours, you are still worse off using credit cards. Yes, you may be accumulating “points” but people spend more money with credit cards than they would if paying by cash. As CNN Money notes:

Studies find that when you use a credit card, you buy more stuff and you’re willing to pay a higher price for it.

After McDonald’s began accepting credit and debit in 2004, diners who paid with plastic spent $7 a visit on average vs. $4.50 when they paid in cash. A 2003 survey of supermarket receipts found that credit-card shoppers rang up 30% bigger bills than and carted out twice as much in nonessentials as cash buyers did.

In an experiment that pitted cash and credit-card bidders against each other in an auction for Celtics tickets, Drazen Prelec and Duncan Simester of MIT’s Sloan School of Management found that the credit-card payers spent twice as much as those who used cash. “It’s clear that people who use credit cards are willing to tolerate higher prices,” says Prelec.

The problem with credit cards is that you are much more likely to make impulse purchase and you are less likely to hunt around for better deals and cheaper options. Both of these are the antithesis of frugality.

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3 Responses to Another Reason to Get Rid of Credit Cards

  1. Joanne says:

    Simple, but I hadn’t thought of it like that. I shop for groceries with a debit card and I don’t really think about what the total will be until the checkout because I know the money is there. If I took a fixed amount of cash into the store, I probably would be a lot more careful. This is something to try for me.

  2. steve says:

    This is beyond true. I work in retail and I can tell you that retailers KNOW that the credit cards are responsible for a lot of their bottom line. Which might tell you something about the lack of sustainabllity of our current retail infrastructure.

    People focus on the 1% cash back and forget about the 20% they are overspending and losing. If you want to get the most for your money, a) make a monthly spending plan that includes the money you put away as savings and b) move to a cash spending system on some of your everyday spending categories.

    You definitely will see a difference in the level of your spending and your awareness of your spending. Money may start to *creak* when it comes out of your wallet.

    As an example, over the past few years I thought that $140 a month was a kind of minimum for food for the month for me, (for groceries and no eating out) but it’s looking like I could come under $100 for this month since I am using a cash envelope of $100 for the month of december for my groceries. And I eat very well–lots of salads, green vegetables, and other healthy stuff–just not expensive stuff. The cash envelope is making the difference because when I’m in the store, I look at my list and the envelope of cash and am aware that this cash needs to feed me until the end of the month! Very different than just grabbing stuff and throwing it on my credit card, even though I pay the credit card off every month.

    Cash envelopes rock!

  3. Jack says:

    Very insightful!
    This is the kind of thing you don’t realize until someone else points it out.

    Find money-saving tips at http://www.jacksperks.com/blog
    and use the extra cash to pay off your credit cards ASAP.

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