Credit Cards Vs. Cash: Do I Really Spend More With Credit?

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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: 

  • Overseas currency exchange savings by using credit cards
  • Cash back
  • Car rental insurance savingsSince none of you forwarded me all your personal financial information I guess I will have to use myself as the guinea pig for this post.  I’m going to give you a behind the scenes look at the math I used to see if credit cards or cash cost me more in 2009.

    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?

  • Comments

    1. Cedric D'Hue says

      Hi Craig, good article.

      My wife and I are credit card users. But we always pay it off at the end of the month and we never pay fees or other silliness in use of the card. I can confidently say that we do not spend more when using our credit card than if we used cash. For us, our budgeting is in the decision-making process, not in the payment process.

      I struggle with the focus between paper (cash) or plastic (credit card). This focus fails to deal with the primary problem of overspending, not budgeting. It doesn’t really matter if you use paper or plastic, those are just payment options. Sure, minimize the costs of those payment options, etc. but let’s get on a budget first.

      Matthew 6:21 talks about “For where your treasure is, there your heart will be also.” Yes, this scripture refers to storing up treasure in heaven instead of on earth. I also look at this scripture and think of internalizing our financial decisions in our heart, how these decisions relate to our financial stewardship, and ultimately how our stewardship strengthens our relationship with God.

      I believe we need to have the budgeting process occur in our hearts first.

      Also, we should grow and mature in our financial stewardship. Why stick with the cash method for the rest of your life when you are strong enough mentally to handle a credit card? Why use an external control, such as using cash, even when you have a firm internal control over your finances? I note that these comments about graduating to credit are for those who are doing well under their cash method. Jeremiah 12:5 says “”If you have raced with men on foot and they have worn you out, how can you compete with horses? If you stumble in safe country, how will you manage in the thickets by the Jordan?” The other side of this scripture is if you are wearing out the men on foot, get ready for the horses. If you are sure footed in safe country, get ready for the thickets by the Jordan. God wants us to mature and handle greater levels of difficulty in all areas, including financial stewardship.



      • says

        @Cedric. When we started using cash primarily to purchase items we found that we did spend less with cash. I’m not sure if that is the case in your situation or not. Bascially, with a credit card we always had the money to buy things. However, with cash if we didn’t have it (on hand) we didn’t buy it. Sometimes we went back to buy it and sometimes we didn’t.

      • says

        @Arthur – I mention this exact point in the article. However, looking at the whole picture I think the discussion is more complex.

    2. Gholmes says

      Putting credit card debate aside for the moment, Nothing is free. There is a cost. Now back to credit cards, thier marketing campaigns, nice buildings, large bonuses someone is paying. Forget the sorry saps that dont pay off every month, look at the merchant fees. The merchant fees gets added to the cost of goods sold. In your analysis you didnt include any of those costs.

      @ Cedric “Strong enough mentally to handle a credit card”. When do you deem yourself or a “weaker” brother strong enough to acquire a credit card to use?

      • says

        It is true that the industry must charge more to cover fees. However, one cannot save those fees by avoiding credit cards – that is why I didn’t factor it in as an actual cost.

    3. Gholmes says

      Now lets go back to the sorry saps that dont pay off thier credit cards each month.

      Is it appropriate for a christian to use a tool that is “free” to the mentally strong but it enslaves our weaker brethren?

    4. Cedric D'Hue says

      @Gholmes, excellent question. Of course there is no objective standard. My thoughts are that if you are no longer struggling with the cash method, why not start incorporating a debit card, and at some point progress to a credit card? I mean Dave Ramsey has been using the cash envelope method for decades!!! And he teaches others on radio and television about how to manage money. He could probably use a credit card and teach others how to progress past the cash envelope system.

    5. Cedric D'Hue says

      @ Gholmes, Excellent question! I am reminded of I. Cor. 8:13: “Therefore, if what I eat causes my brother to fall into sin, I will never eat meat again, so that I will not cause him to fall.” I don’t want to cause other christians to fall but does that mean I shouldn’t use a credit card? What if I show my brother in Christ how not to fall? Isn’t it better if I help my fellow christian become a better financial steward?

      Very thought provoking discussion. Thoughts?

      • says

        @Kathy. I think your ‘feelings’ are right. At least they agree with some of the math I’ve done. And yes, I still use them also.

    6. says

      Does Dave know about this? lol

      I completely see your view, but to the death, I think Dave Ramsey would defend the cash only, cut your credit card approach. As for sound tips on budgeting, I’d have to agree with him about 95% of the time.

      You gave some very logical reasons to keep and use credit cards. You, however, probably manage your money and are conscious of what you spend whether it be cash or plastic.

      As a personal financial consultant I run accross people who have no idea how much they’re spending, and when we do a budget, they are often floored with the amount of money they spend on their cards each month.

      I think it’s true that plastic “doesn’t hurt” as much and they don’t realize how much they’ve spent until the bill comes in.

      I like the cash method. Do a good budget, and withdraw in cash the spending money for that week. When it’s gone, you’re done spending.

      For the fixed costs like hydro, phones or whatever, keep using the cards, but make sure you’ve done everything to keep those costs as low as possible.

      Sorry for the long comment,

      Great Post,

      .-= Guy G.´s last blog ..The Mind/Money Equation – Tips on Budgeting =-.

      • says

        My family has done cash only and credit only. Both certainly have advantages. The budget and discipline are huge.
        Great comment, thanks.

    7. says

      I’ve never understood the “you spend more when you pay with credit” thing. And I have yet to actually see a reputable study. Can someone point me in the right direction?

      Even if this study exists, I don’t see how it could possibly be accurate. How do you decide what was really purchased ONLY because you used a credit card. For example, if I’m at the gas station and I see a pack of gum I want, I don’t think “Oh, I have a credit card so I can spend whatever I want.” I think “Oh a pack of gum. I’ll buy that.”. The method of payment never enters into my mind.

      • says

        Thanks for the comment.
        As to the formal research I’ve never read on myself. I have done the test on myself – used only cash instead of credit. In my case, I did spend less with cash. Mostly it was times when I didn’t have the cash on hand so I didn’t buy the time. Later, I never went back to buy it.
        I guess the only way each person could know is by trying it themeselves.

    8. says

      @Ryan — Not sure about the “reputable study” bit, but this is something I found: “A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash. And McDonald’s found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash. ” Perhaps you can use that to find a study. McDonald’s may not be a formal study, but just internal type stuff. It looks simple enough — number crunchers look at total receipts when McD’s accepts only cash, then look at total receipts (together, plus divided into cash & credit, in case other factors such as inflation cause a higher total), then look at the differences in the groups — total receipts when it was cash only; total receipts when it was cash + credit; total receipts of cash only & total receipts of credit only — then analyze the differences to see if it is a real change or not.
      .-= Kathy´s last blog ..Paid too much for that whistle =-.

    9. says

      I really do think credit cards have somewhat of a place in society, but there are many instances where CC usually lead to entrapment as credit cards are usually only as good a credit tool as those that possess them along with their financial education and their personal finance habits.
      Good post.

      Dwight Anthony

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