Do you spend more if you use credit cards vs cash?
I cannot say with 100% certainty that I spend more one way or the other. I was all cash for a short amount of time a number of years ago. At that time, cash was like handling a magical object. I kept withdrawing and it would disappear leaving me with no clue on where I spent it. I could have maintained a spending log or at the very least collected all my receipts to analyze by the end of the month, but I didn’t have that much discipline. This was the time when I was living paycheck to paycheck.
I moved on to credit cards and have never looked back. I love my credit cards.
Why credit cards are better than cash?
Most people recommend using cash to get rid of “evil” credit cards. I don’t believe credit cards are evil at all. In my opinion, they are an excellent financial tool as long as they are handled responsibly. I don’t charge something to my credit card that I wouldn’t have bought with cash. Credit cards provide me with a lot of perks that cash doesn’t. To name a few-
- Security/fraud prevention
- Price protection
- Return protection
- Extended warranty
- Roadside assistance
- Rental car insurance
See the complete list of perks and benefits of using a credit cards.
Credit cards also help me build credit. I know I won’t buy a home with cash. To get the best mortgage rates, I need a great credit score. So responsibly using a credit card definitely helps me save money in the long run.
What about the claim that credit cards makes me spend more?
Why is cash better than credit cards?
I pay my credit card in full, I don’t pay interest or late fees. So I am going to ignore that reason for going cash. Even then, there are several academic studies that show that people spend more while using credit cards vs cash. The reasons for this discrimination include-
- Paying cash hurts: A study done in MIT, through MRI scans, showed, pain centers of our brain are activated when paying with cash. We like holding on to hard, cold cash; when we have to part with it, it hurts. By comparison, using credit cards is like using Monopoly money, you don’t have the same emotional connection you feel with cash as with a credit card. According the the research, the savings by paying cash ranged from 12-18%.
- The left digit effect: This is one reason I feel I am leaving money on the table by using a credit card. Left digit effect is simply rounding down the number instead of up – counting $2.99 as “somewhere in the neighborhood of” $2, just because only the left digit registers in our mind. I tend to do this. I can see how physically paying $3 and getting practically nothing in return will force me to think “$3” when I see $2.99.
- Paying cash shifts the focal point of the purchase: When people are paying with a credit card, they tend to focus on the benefits and features of the product, whereas when people are set to pay cash they tend to focus more on product costs (monetary and non-monetary). I think this is due to the fact that there is a time break between the actual purchase and parting with our money.
I can definitely see the merits in the cash-only camp arguments. May be I do spend more money using credit cards without realizing it. I have learned enough about the psychology of money to see how I can save money by going all cash. What better way to find out than actually trying it?
To add more weight to this experiment, I am going to add my own reason to go cash-
- Lack of convenience: I am lazy. Credit cards are too convenient. If I have to go to the ATM every week and withdraw cash for me to use, sooner or later my laziness will get the better of me and I will start postponing my trip the ATM, which means I will start skipping purchases and stretching what I already have. Ha! Finally a use for my laziness!
I am not going to give up on my credit cards. As I mentioned above, I value the ancillary benefits too much to give them up completely. But I am going to go all cash for the rest of the month and compare how I do. I also plan to keep a journal to immediately record my feelings every time I open my wallet.
Taking into account the added advantage of my laziness, I am guessing I will definitely save money in the next 20 days. What would be interesting to see is
- How much do I actually save during the 20 days
- Am I affected by all the factors that work against paying with a credit card
- In the long run, which is better – cash or credit cards? What is the tipping point that will force me to choose one or the other?
Potential savings from this tip: $50-$250