Credit versus Debit/Cash

[Anonymous]

For the past few months I have been using my credit cards religiously for every single purchase possible. My reasoning for doing this was because of the fact that I get 1.5% cash back. I PIF every month so I figured that I was making money.

What just struck me however is that in some instances I have a habit of buying that "extra" drink or that additional "shirt" on my credit card, figuring that I'll just cover that charge once I get my paycheck.

Sure I could go get cash right away and pay for the item instead of using my credit card but I know that if I had to actually go to an ATM and withdraw cash to buy that drink or item that it'd most likely not be bought.

So while I make my 1.5% cash back on that purchase, that other 98.5% is lost. I spend about 1K a month on my credit card. At 1.5% back that's $180 cash back per year.

Now assume I spend JUST $25 more per month because I use a credit card instead of cash or debit where I feel the hit immediately. If I saved that $25 I'd end up with $300 for the year. That's $120 more. If I increase that to $50 that's $600 and so forth.

I'm starting to wonder if the best way to "reward" myself is to actually just start using cash and debit again for discretionary spending and putting only those expenses I absolutely HAVE to incur such as groceries on my CC. 100% cash back beats 1.5%!

Message Edited by jpreloaded on 07-28-2008 02:10 PM

[Creditaddict]

I charge everything under the sun to credit cards... Granted it takes strict guidance for me to make sure I have the money to pay for all the charges (I didn't use to).  But now that I have 1 goal in mind, being debt free... I pretty on target with my charging and I'm not going to pass up the rewards that I get from that charging by using cash.

[Anonymous]

I'm looking at this more from an opportunity cost perspective moreso than spending more than you have. It's not that I can't afford to spend that additional $300 per year, it's more that instead I could put that $300 into retirement or to pay off other debt.

There's a statistic out there that people spend more on a credit card than they do with cash/debit. Regardless of your ability to pay it off or not, that's additional cash that might not have been spent.

Message Edited by jpreloaded on 07-28-2008 02:18 PM

[Creditaddict]

oh I get your point now, and I'm sure of the fact I spend more on credit than if I paid cash, but cash just isn't always available on that day, but credit can be graced by as much as 30 days.

I guess if I was rich I would either swipe amex exclusively and not care about over spending or i would carry a stack of $100's!

[Anonymous]

If you made it a goal to cut spending and save, then I bet you would not get that unneeded shirt or extra drink. Is it just the convenience of the card? I usually don't spend more when I only use cards, but I know other people who say they only take out enough cash for the week and that's all the use and it is a better way to budget.

[kball64]

This is interesting because I was just talking about this yesterday with someone.  I used to pay for all of my purchases including bills with my debit card.  That's because my credit was in a shambles and I had no credit cards to use.  So within the past few months I have credit again and I've been using my 2% cashback rewards card for everything that I would normally have used my debit card for.  My rewards are racking up but the bad news is that I'm spending too much also.  I was considering maybe going back to my old debit card ways for a bit to get myself back on track.  I am still able to PIF my CC, but I know it's much more than I was spending per month before I started using the CC. 

[Scamp]

The best I've been able to do in maxing the rewards opportunity with a cc while making sure I don't spend more than I can PIF or otherwise afford to rack up on a cc was to go ahead and use the cc to pay for things but deduct each purchase amount in my checkbook register as if I was using my debit card - checking acct. gets low, quit buying stuff.  I also tend to actually pay the card multiple times a month so that my online account info for my checking account is more nearly in line with my register.

If how much (or little!) I have left to spend is staring me in the face in two places, it's a lot easier to resist the 'pay for it next paycheck' rationalization!

Works really well for me.

[Anonymous]

So, you are wondering what?

I use the lowest apr card I can to purchase what I truly have considered.

I think you answered your own question.

[Anonymous]

I'm saying that regardless of APR (which doesn't matter to those who PIF anyways), on average people spend more on CCs than they would if it came immediately out of their own pocket.

So for MOST (not all) people, they might actually be better off just using a debit card/cash if their only purpose for using a CC was rewards.

[Anonymous]

Michelle Singletary is a personal finance columnist for the Washington Post, and recently wrote a couple of columns on this exact issue.  She can be a little strident, and she got a lot of criticism on the articles, but worth reading, I think.

The first article, saying that we spend more when we use credit

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/07/AR2008050703742.html

Second article, follow up with response to criticism of first article (with citations to research):

http://www.washingtonpost.com/wp-dyn/content/article/2008/05/14/AR2008051403354.html