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.
I am still using credit cards only but I treat mine like cash….so I don’t overspend and I buy what is on my shopping list and then get out. I really dislike touching cash so credit only works for me.
Of course I pay my credit cards every week via ING so I never carry a balance and don’t pay fees or interest.
Money Beagle says
Well, we still use credit cards for a lot because of the cashback rewards. We pay the cards off every month, so if I switched those purchases to cash, I would actually be losing money.
Sustainable PF says
We prefer credit card. We pay off what we owe every pay cheque (2 weeks) and have never once paid interest. We have a cash back card so the CC company pays us – to the tune of $500 in 2010. I think those who are adamant about paying their CC off ON TIME are wise to take advantage of reward cards. Those who cannot pay bills on time (for whatever reason) should stick to cash. Each case must be analyzed individually.
Another drawback of using cash — no rewards. If you have a cash back credit card and use it responsibly then you get some free money. It’s like cashing in all the loose change you accumulate. It really adds up over time.
I heartily disagree that missing out on rewards is a drawback to using cash. Many years ago, when I was happily debt-free, I signed up for my first credit card which gave me frequent flyer miles with each dollar spent.
And there it began – my descent into nearly two decades of consumer debt, which took years to pay off. It all can be traced back to a “rewards” (in this case, airline miles) card. Rewards were the bait – and I took it hook, line and sinker.
Now I’m credit card free, have been for nearly eight years, and no rewards can ever tempt me to return to credit cards. I use debit cards to book flights, hotels, and rental cars. The money I save on interest and fees (not to mention the freedom from worrying about the latest rip-offs from card companies) more than makes up for any loss of a a few bucks in rewards.
@Matt — I think it all goes back to being responsible with your money. If you budget out your purchases, put them all on a rewards credit card, and pay off that amount IN FULL every month, the credit card company is essentially giving you your rewards, with no extra work on your part. I’m a graduate student, and I put enough of my bills, extra expenses, and reimbursable expenses on my credit card to earn about $100 reward card every year. That’s free money to me and I am spending no more than I budgeted.
No rewards points with cash either.
I use cash very little. I won’t give up my credit card because of what was sai, rewards and convenience. I would add the ease of returning a product.
All very good points about the benefits of using credit cards. The back to cash movement most benefits those who carry a balance and have to pay interest. There is no point in getting rewards if you are paying interest, especially with many of the current interest rates.
Matt, thanks for sharing your cash only experience.
I still prefer credit cards for almost all of my purchases. I’ve been toying with the idea of using cash for things like eating out and going to the movies though, because I see one of the drawbacks you mentioned as a possible advantage: cash is inconvenient.
Jane Sanders says
I only use my credit cards when buying big ticket items. For other purchases, I use my cash. It’s easier for me to manage my money and it’s harder for me to spend if I use cash instead of card.
I wish everyone in the country would ban together and do this for a month. It would totally shut down these credit card companies. Great article!
There’s been a growing movement of people that are using cash only for purchases rather than use their credit cards. See the pros and cons of cash only. More credit card mailings are going out to consumers, sending a loud and clear message from credit card issuers: We want you back.
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