In a recent article in which I highlighted eight benefits of credit cards, a reader named Wayne asked a great question: “What about the extra 10 to 15% most people spend using credit?”
There have been numerous studies demonstrating that people do, in fact, tend to spend more when using plastic instead of cash.
One frequently cited study found that people spend 12-18% more when using credit cards instead of cash. McDonald’s has found its average ticket is more than 50% higher when people use credit cards instead of cash.
Cash is real. Pulling real dollars out of your wallet makes you think twice about how much you’re spending. A credit card is a financial abstraction. Using one doesn’t feel like spending real money, which is why it’s easier to overspend when using plastic.
The distance between us and our money is growing
Money is continuing to become more abstract. At some retailers, you don’t even have to take your credit card out of your wallet.
A recently developed shopping bag (a “Smart Internet Connected Bag”) rings up items when you put them in the bag and charges your credit card when you leave the store.
The company behind the bag highlights benefits to the shopper — “no lines and immediate checkout.” They call it “lift and leave” technology and “frictionless checkout.” But I assume there are even more benefits for the seller. The less friction—the less we have to actually touch money or credit cards—the more we’ll spend.
Visa will soon roll out a finger print reader that adds more distance between shoppers and their money. Just wave your hand over the reader when checking out and what you bought will be added to your monthly bill.
Using technology to our advantage
What’s a poor shopper to do? As financial abstraction increases, are we destined for lives of increased overspending?
No! We can fight fire with fire, or in this case, technology with technology.
For example, the budget app we use, Mint, captures all of our electronic transactions (anything other than cash transactions), enabling us at any time to see our actual spending in a given category vs. our budgeted amount. Before I walk into a store, I’m in the habit of using my phone to see how much I’ve spent so far that month on clothing, or sports gear, or whatever else I’m shopping for. It enables me to manage to the numbers in our budget.
You can also set up alerts so you’ll receive an e-mail if and when you exceed your budgeted amount in any category.
Will you overspend when you use credit instead of cash? Yes, if you don’t keep track of how much you’ve spent in each category throughout the month.
However, proactively managing to the numbers in your budget with the help of tools such as an online budget app, is what can prevent overspending, whether using a credit card, an Internet connected shopping bag, or a finger print reader.
Can you think of other financial abstractions? And in this financially abstract world of ours, how do you keep your money management real?
Coming from someone who has had his ups and downs with credit cards, I have finally mastered control. One good way to build credit, raise you credit score and actually make money, is to use a rewards card like Barclays to only pay anything you would have used your ATM/checking to pay. Here are some examples, phone bill, car insurance, utilities, groceries and any other bill you can pay with a credit card. As soon as the payment shows on your credit, usually 2-3 days, pay it off. Again, these are payments that have to be made, and if you use a rewards credit card, you get the rewards. I have used the points to pay/credit my balance by over $250. It takes discipline, but it can be done, and I am doing it.
I agree, Lar — it CAN be done. I have no problem with someone choosing not to use credit cards. For many, that can be a very wise choice. But I do have a problem with teachers who make blanket statements that no one should have a credit card. It takes being proactive, intentional, and knowledgeable about how much you’re spending when using a credit card, but credit cards can be used responsibly and even profitably.