Are credit cards the devil?
Some folks seem to think so, cutting up their credit cards in elaborate ceremonies and declaring their resulting freedom and steps back onto the path of right. If they have problems encouraged by credit cards, and thinking of credit cards as evil helps them, I think it’s great that they do it.
But personally, I’m a big credit-card user. We pay our balances off each month, but I have often tried to move more of our spending onto credit cards. I find that it helps make sure certain regular bills get paid on time. We also get rewards on each of our cards—usually cash back or points (that we have typically flipped into one of the cash-back options)—so that builds a small but additional 1-3% discount on our bills and purchases. And we theoretically get a bit on the float, during that brief period that my money sits in my interest-bearing account instead of having been paid immediately.
So I was quite interested to read that studies indicate that using credit cards makes people spend more than they would than if they were using cash.
The book Going Broke, by Stuart Vyse, and the July 2008 issue of Money’s article, “Life without Plastic,” discuss some of these studies. As the Money article put it in its opening:
Even if you faithfully pay your bills in full every month… you can profit by kicking the plastic habit,… Studies find that paying with a card turns you into a different shopper, one who is less price sensitive and more extravagant.
Here’s a rundown on some of the studies:
- A study of spending at supermarkets found that people paying with cash spent $32.96 on average—including $9.08 on “nonessential items.” People paying with credit cards spent $43.49 on average—including $18.72 on nonessential items.
- A study of spending at a fast-food restaurant found that people who paid with cash spent $4.50 per visit on average. People paying with credit cards spent $7 per visit on average.
- A study of tips at a restaurant found that cash tips averaged about 15%, while credit-card tips averaged about 17%.
- A study interviewing students as they came out of a campus bookstore tested how well they remembered the amount of their purchase. For students who paid cash, 67% remembered the amount. For students who paid with a credit card, only 35% could remember how much they spent—apparently just minutes after making their purchase.
- Another study used an auction for a pair of popular tickets to a sporting event—the last regular-season game for the Boston Celtics (that they needed to win to make the playoffs). It gave one set of bidders a sheet that said payment had to pay by credit card; and it gave the other set of bidders a sheet that said that payment had to be in cash. The credit-card bidders were willing to pay twice as much as the cash bidders.
- And perhaps my “favorite,” one study showed students photos of various products and asked them how much they would be willing to pay for them. One group was exposed to credit-card-related materials, just left on the table before they went through the photos. The other group had no such materials. The students who saw the credit-card-related materials first were willing to pay significantly more money for the same products.
No study is perfect, but the studies tried to account for differences in financial circumstances or the like between credit-card users and people who tend to pay in cash—and they tried to find results where the researchers believed credit cards caused or contributed to the behavior (as opposed to them being just correlated).
Anyway, it’s quite easy to expect that these researchers would tell me that I’m most likely spending my supposed 1-3% credit-card “rewards” on the front end, with more purchases or less attention to the purchases I am making—and I may not be saving anything through credit-card cash back!
Well, I’m not quite ready to throw my credit cards in a big bonfire, but this has definitely raised my eyebrows. Some of this I can immediately see in my own behavior. Consolidating our bills onto our credit cards has lots of advantages—but I absolutely have less idea (or no idea!) what our spending by category is, if I don’t actively go and look. For instance, I remember when we paid our heating bills by check, the numbers would stick with me when we had a particularly painful bill. I or my wife would be looking at the bill to write out the check, probably wincing out loud in the other’s presence (so he or she got a sense of it too), and wincing all the way through writing the numbers out. We’ve since moved that bill onto an automatic credit-card payment program (since the utility doesn’t charge anything extra for us to do it). At this moment, I can’t remember the amounts of any our heating bills from this past winter.