A few years ago, it was a credit card user’s world. As long as you paid on time and didn’t go over your limit, you could have your choice of credit cards and interest rates. However, with the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act) that went into effect last year, meant to crack down on credit card companies, consumers are finding that they are paying higher interest rates. In addition, it can be harder to negotiate a lower interest rate.
I had a credit card for over 15 years that routinely offered an interest rate below 10%. Now, the interest rate is 15.99%. When I called to have it lowered, they would not negotiate with me as they had in the past. When I threatened to take my business elsewhere, they were unfazed. “Sorry,” I was told, “there is nothing we can do at this point.”
What is a consumer to do? Suze Orman has started a back to cash movement, urging consumers to make their voices heard by NOT using their credit cards. Likewise, Dave Ramsey advocates not using credit cards in part because on average, when a consumer uses credit cards, they spend 12-18% more than they would when using cash.
Benefits of Using Cash
-You can’t overspend. When the cash is gone, it is gone.
-You won’t have to pay an annual fee or interest. The average American has $8,000 in credit card debt. At 15.99% interest, that is $1,279 in interest paid yearly! You may argue that you use credit cards and pay off the balance each month, which is great, but what happens if you suddenly lose your job or are injured and can’t work for a while? Would you still have the money to pay off that credit card balance?
-You feel the pain of your purchase. It is hard to part with your cash. According to Professor George Loewenstein of Carnegie Mellon, who conducted a study looking at brain images of 26 people to see how they responded mentally to various prices, “Credit cards effectively anesthetize the pain of paying. . . You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”
Drawbacks of Using Cash
-It is inconvenient. My husband and I have started using cash the last few months because we are without my salary and money is tight. I can’t tell you how many times we have left the house without cash. When you use credit cards all the time, you rarely carry much cash, and it takes a while to develop the habit of carrying cash again.
-There is no theft protection. If your wallet is stolen, your credit card company will cover the charges made by a thief. No one will protect you from loss of cash.
What about debit cards? Many people who swear off credit cards have no problem using a debit card (attached to a checking account). While it is true that you must have the money in the bank to use a debit card, you still can be disengaged from the spending process. If you do overspend, as you can with a credit card, there are overdraft fees to pay.
In my opinion, nothing beats the pain of handing over cash, but if you want to send the credit card companies a message that you won’t be had by their current fees, and you dislike using cash because of the inconvenience, a debit card is a nice compromise.