I previously attempted to answer this question – do you spend more with credit cards?
Unfortunately, I realized my attempt to answer that question was flawed for a couple of reasons. First, I have no idea how YOU use your card. All I can address is the question – do I spend more with credit cards? Second, I didn’t factor any of the following:
Calculate the True Cost of Credit Cards
Step #1: Isolate all the ‘fixed’ charged from the ‘variable’ charges
I went back through my two Visas and I totaled how much I spent on both cards in 2009. The total = $20,526 charged on cards.
However, I felt that to get a fair idea of how much extra using my Visa cost I needed to separate costs that are not possibly influenced by the how I pay for the product. For example, I don’ pay more for gas by using credit. I don’t pay more for medical bills when I pay for credit. There are charges that I need to pay on a regular basis regardless of my method of payment.
As an example the fixed costs included things like airfare for our trip to North America (airfare + hotels), gasoline, doctors bills for our baby born in 2009, and health insurance payments. Total charges = $17,452.
The rest of the charges are things that we might have bought on a “whim” like groceries, clothing, dining out, and other random purchases. This total came to $3,074
Step #2: Add credit card cash back to the equation
Since I used my Visa for the $17,452 I was able to get 2% cash back. $349 cash back.
Let’s assume that Dave Ramsey is right and for my variable expenses I paid 12% more (I don’t think this is true but I’ll give Dave the benefit of the doubt. By the way I do think people spend more when they buy with credit instead of cash just not 12% more). Then I would have paid $368 credit card extra spending penalty on that $3,074 that I spend.
Hmmmm. Looks like plastic cost me an extra $19.00 in 2009. Even if it did cost me $19.00 it would have been worth the convenience because there are definitely advantages to credit cards over cash.
But the math is not done here.
Step #3: Account for foreign currency exchange savings with credit card
When I use my plastic overseas I have a 0% foreign exchange fee credit card. When I get cash out of the ATM overseas I pay a 1% fee.
In 2009 I spend $7,485 in a foreign currency. With the ATM I would have paid $74.85 in fees, but with plastic I paid $0.
Now that actually means I saved $55.85 by using a credit card.
But, we’re not done yet.
Step #4: Factor in the auto rental insurance while renting a car
I rented a car for a week during 2009. I declined the credit card auto insurance and instead just used my credit card insurance. My full insurance would have been $8.95 per day. Thus, I saved another $107.40.
Did using a credit card in 2009 cost more money or save more money?
All told a credit card saved me $163.25 in 2009 and it was much, much, much more convenient than cash. In addition having a credit card helped boost my FICO score.
Now you would obviously need to add up your own numbers to see how they work out, but using a credit card might not be as expensive as you think. In our case, we also have some spending guidelines for credit that helps us control our variable spending on plastic. If you are in credit card debt I promise you that credit cost more than it saves.
Credit cards are not all bad news, nor are they all good news. In light of this observation next week were going to explore the topic of credit card fanaticism.
How much do you think it costs you to have a credit card? Do you think you spend more with credit than cash? Are you a credit card user?