Ah credit cards, surely one of mankind’s greatest inventions? They save you from carrying those huge wads of cash in your wallet, they’re insured if they get stolen (you won’t be getting that cash back if you lose your wallet), you get paid just to use them and they’re perfect to carry for convenience alone! Who in their right mind wouldn’t want a credit card?
Well, I would be firmly in the “no” camp if it wasn’t for the cash back you get for using credit cards, and up until a few years ago, I had never owned one. To me, any form of consumer debt is bad news, and credit card debt is pretty much the worst debt you can get yourself into. Caution should certainly be used with credit cards. Why? Because credit cards have put an unimaginable number of people into lifelong debilitating debt, simply because of the convenience of them.
Making it this unbelievably easy to go into debt is not a good thing for society. People are wired to spend money. When everybody else wants you to spend your money, and it’s made so easy, resisting temptation is virtually impossible.
People are impulsive, if they see something they like, they want it. If they have to physically hand over $500 for that Louis Vuitton scarf, they are far less likely to do so than if they can just swipe their card and worry about paying it back later. It’s been shown that the brain works the same way when spending money as it does from pain recognition. This is why it is difficult to part with cash but not so hard when you’re using a credit card. With cash you feel like you are giving something up, with a credit card it’s a simple swipe and you can easily ignore how much you are spending.
Even if you use credit cards responsibly and pay it off every month, without ever taking on any debt, it’s almost certain that you are spending more money just because of the convenience of carrying a credit card. Studies have shown people spend 12-18% more money if they use a credit card, rather than cash. That kind of makes your 1% cash back pretty laughable, right? A 12-18% guaranteed return on investment would be the greatest asset class on the planet, everybody would invest in something that profitable!
So, don’t use a credit card?
No, you can use a credit card, and as I mentioned earlier I still have one because the upside of credit cards is the cash back and travel points you get just by using them.
Rather, you should restrict your usage of a credit card, and certainly don’t walk around with one everywhere you go.
Mrs. Miser and I have implemented a system whereby we budget our monthly discretionary expenses. However, when we used a credit card to fund them, we simply didn’t track the budget throughout the month and just analyzed what we had spent at the end of the month. Often, we had gone way over budget without really caring. Our budget was more like what we had hoped we could spend, rather than what we truly spent.
So, instead of using credit to pay for all this discretionary spending, we switched to cash. At the beginning of each month, we withdraw all the money we need for discretionary spending and split it into little jars, similar to the envelope system. Now when we want something, not only do we feel the pain of handing over cash, we also have to physically have the cash at hand. Once the jar is empty, it’s empty, we don’t switch to using the credit card. Worst comes to worst we might steal from another jar. In essence, this is just like budgeting, which is basically just an electronic jar system.
One area many people spend a lot of money without realizing is during work. They foolishly don’t take their lunch and snacks to work to get them through the day, get peckish and go and grab a snack or lunch from some greasy hole nearby. This is made entirely possible because they’re obviously carrying around some plastic they can tap on a machine to confirm the purchase. Later, they’ll just go home and bundle all the other pointless purchases together and pay off the piece of plastic without realizing they’re actually spending $400 a month on junk they really don’t need.
Other times they might decide they need a new pair of jeans and hit the mall for a quick purchase. Soon they’ll see all this other shit they obviously don’t need but definitely want and again, they’ve got their trusty plastic ATM in their pocket, so once more they blow a load of money on this junk.
What might prevent this absurd spending? You know, those flimsy pieces of paper and clunky metal things? It does still exist! It actually encourages you to look for a bargain too, so you can make that cash last a bit longer.
But what about cash back?!
It’s true, you will lose some of your cash back or travel points if you switch to a cash system. We keep all regular bills and whatnot on the credit card and use cash for things we cheat on, which isn’t a huge amount but enough to make a difference. We are saving a lot more by removing the ability to cheat than we would otherwise make in cash back, I know that much. I’ve certainly noticed an immediate change in my spending and all it took was to put away the credit card.
If you absolutely can’t live without a credit card, then keep it, but lower your limit to a level that will control your spending. Having a $10,000 limit on your credit card isn’t going to make you worry about hitting it, but if it’s just $500 you’ll be far more conscious of where you are spending the money.
If you are absolutely positive you are not spending more with a credit card than you would without, then keep it. The travel points and cash back are well worth it. However, if you know there are areas in your life where you are spending more money simply because of that piece of plastic in your wallet, the answer is simple.
It’s not just credit cards, convenience takes precedence over various aspects of life that are all hurting your wallet. Technology is advancing so rapidly, and a lot of it is focused on making spending money easier.
How easy is it to buy, well, anything? You can hop online and pretty much buy anything you can ever imagine within a few minutes on a piece of plastic that allows you to spend more money than you have in the bank.
Who remembers the Super Bowl ad that claimed giving mortgages to Americans via an app would save America? Do people really think getting a mortgage approval at the push of a few buttons is a good thing? Here’s a bloody idea, sometimes it shouldn’t be so easy to go into debt. Maybe going into debt should be a bloody difficult process.
Making debt and spending money so stupidly easy probably goes a long way to explaining why 48% of Americans have more credit card debt than they do savings, and why Canadian household debt is hitting all-time highs every single year.
Personally, I think credit cards just promote reckless and thoughtless spending. If people actually had to part with physical cash, they would likely see a sharp decline in their spending.