Six Ways Credit Cards are Better Than Cash

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Published September 28, 2012

| IndexCreditCards.com

Oliver Burkeman, a British journalist, wrote about a bizarre experiment he's conducting. He's locked up his credit cards at home, and each week fills a series of envelopes with the banknotes and coins he's budgeted for various spending categories, which might include groceries, transport, coffee-shop purchases, reading matter and restaurant meals. He's hoping that this is going to reduce his spending, but his major finding so far is that people behind him in line grow worryingly impatient when he's searching through his backpack for the right envelope, and then counting out his cash.

Do credit cards make you spend more?

Burkeman was partly inspired by a study by academics at the universities of Kansas and South Carolina that appeared last November in the Journal of Consumer Research. This suggested that using a credit card actually changes the criteria by which you judge the product you're buying. When people use cash, they tend to focus on the cost aspects of their purchases. When they use credit cards, they focus on the product's benefits.

Study authors Promothesh Chatterjee and Randall L. Rose commented,"Our findings suggest that marketers may be affecting not just the amount of money consumers are willing to spend but also the nature of the goods and services that find their way into consumers' market baskets…"

Plenty of earlier studies (notably Hirschman's in 1979) have suggested that credit card use tends to lead to what some academics call, apparently with no embarrassment over their abuse of the language, "supra-optimal spending."

Maybe not

However, one 2009 paper from researchers at Carnegie Mellon University described a fundamental flaw in most of these earlier studies: It's easy to show a correlation between credit cards and higher spending, but much more difficult to prove cause and effect. People who use plastic are often more affluent than average, while people who pay in cash sometimes do so because they have no choice. Perhaps they can't get approved for a card because their finances are in a mess, and consequently they endure serious liquidity constraints. Let's face it, there's not much to be learned from the "revelation" that richer people often spend more than poorer ones.

In "one of the first randomized controlled experiments to examine the impact of credit cards on spending," the authors of that 2009 study, Elif Incekara Hafalir and George Loewenstein, tried to filter out as many extraneous factors as they could. And their report says: "The main finding of this paper, that use of credit cards did not significantly, on average, increase spending was a surprise to us."

A problem only for a few

Hafalir and Loewenstein went on to warn about the dangers of drawing too many conclusions from their study, and many still think it likely that the payment medium you employ is going to have at least some influence over the amount you spend and the purchasing choices you make.

But surely this is a problem only for those who can't afford those choices. If you have enough money, why shouldn't you decide to purchase a product based on its performance, prestige and appeal rather than just on its costs? Isn't that what everyone who buys a Cadillac, a pair of Jimmy Choo shoes, a top-spec television or anything with a designer label is doing, regardless of how they pay for it? And isn't that a fairly critical component of our free-market economy?
 

None of this stops some financial advisers taking an extreme line on credit cards. On his website, Dave Ramsey, a highly respected personal-finance guru, writes: "Responsible use of a credit card does not exist… There is no positive side to credit card use. You will spend more if you use credit cards." [His emphases.]

Six positive sides to credit card use

"No positive side?" Even (perhaps, especially) if you choose never to roll forward a balance at the end of a month, here are six:

  1. If you lose your cash or it's stolen, it's gone. If your mainstream credit card goes AWOL, you should quickly receive a replacement, and be no worse off.
  2. Once your money is in the form of banknotes and coins, it can't earn interest. With unsecured credit cards, you get a free loan from the time of purchase until the next billing cycle's due date. In the meantime, your money can be working for you.
  3. Rewards credit cards reward you. Play your cards right (sorry), and you can get worthwhile cash back on purchases, or free flights, gift cards, merchandise, hotel stays… the list is endless.
  4. Good luck getting your money back if you're ripped off in a cash transaction. Credit card companies have a statutory duty to protect you.
  5. Some credit cards (certainly those from American Express) give you a free extended warranty on eligible purchases. This can increase a U.S. manufacturer's standard warranty by up to a year. You may also find that your card covers you for a shorter period if an eligible purchase is lost, stolen or accidentally damaged.
  6. Many cards offer perks. For example, some airline credit cards let your first checked bag fly free, and they may smooth your way through the airport with lounge access, and priority check-in, security screening and boarding. Other types of plastic may provide you with free roadside assistance, or allow you never again to have to pay a collision-damage waiver when you rent a car.

Two ways in which cash is better

Having said all that, credit cards aren't for everyone. Here are two ways in which using cash can be better:

  1. If you're one of those people who can't manage money well, then plastic can pose real dangers. Use cash, and you can be sure of never suffering the misery of credit card debt.
  2. Cash is accepted everywhere, while cards are accepted only almost everywhere. For some things (your kids' pocket money, for example, and on-street donations to the homeless), only cash will do.

That point about credit card debt is a serious one. If you really can't control your spending, and have swiftly maxed out every card you've ever had, then Dave Ramsey's advice is sound. For most of the rest of us, less so -- especially if you don't want the people behind you in line to hate you for holding them up with your 18th-century envelopes, banknotes and coins.
 

The original article can be found at IndexCreditCards.com:
6 ways credit cards are better than cash

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http://www.foxbusiness.com/personal-finance/2012/09/26/6-ways-credit-cards-are-better-than-cash/