Recent consumer research reveals that 45% of consumers with credit cards carry balances month over month. While we know that high interest rates can negatively impact wealth for these consumers, the costs of credit card spending are not as obvious for those who pay in full.
When I stopped using credit cards altogether for nearly five years, there was a clear difference in how much I spent, how often I shopped and how expensive the items were that I chose to buy.
You Spend More On Higher Priced Items and Impulses
Acccording to MIT Psychology Researcher Drazen Prelec, “People tend to spend more when using credit cards than cash. Not only are they more likely to buy something at a higher price, they also are likely to give larger tips and make more impulse buys.”
I’d love to say it was pure discipline and my motivation to save and invest more money, but it was mostly because it was a lot more inconvenient to buy things on a whim. So, when I did choose to buy something, I was pretty sure that I wanted it.
A study by the Journal of Consumer Research showed people who pay using a more painful form of payment such as cash increase their post-transaction connection to the product after the purchase in comparison to those who pay with less painful forms of payment like a credit card.
You can test these research findings yourself by reviewing your last credit card statement. Looking at each of those transactions, would you have spent more or less if you had to pay for them with paper dollar bills?
The study also found that people who pay with cash increase their emotional attachment to a product. If you are someone who is prone to impulse purchasing, removing the availability of a credit card can put a healthy boundary around spending only when you’ve carefully considered why.
It’s Harder To Plan And Time Expenses On A Monthly Budget
Aside from increased spending, many of my financial education students find it difficult to stay on a budget when actively using credit cards. Their expenses not only become more unpredictable, but depending on when their credit card bills are due, they find themselves short on cash for other items not charged on their cards.
I found it to be significantly easier to fix my monthly budget and maintain it when I paused my own credit use. Once I ran out of cash I had allotted to my various budget line items, I had no choice but to wait until the following month.
Even if you continue to use credit cards, you can time your budget and payments by calling your credit card company and asking to change the due dates to align with your other expenses.
You can also pay off your balance in full at the end of calendar month. You can more easily see how much was spent within that calendar month versus carryover form a previous month in your budget.
Even better, I pay off my credit card balance every week, so that I don’t run low cash balances by surprise. This forces me to still feel a little more of the pain of spending versus letting a whole month go by between making the purchase and paying for it.
A One-Time Event Can Turn Into A Long-Term Headache
When I first became a money coach, I falsely assumed that every person who had credit card debt was a frivolous spender.
It turned out many of my students accumulated credit card debt after years of having been responsible credit card holders. All it took was a one-time emergency — one job loss, one huge medical expense or one major car repair — to create a growing mound of debt that they could not get out from under.
Average credit card balances grew by 13.2% to $5,910 in 2022, according to Experian data. With interest rates climbing, even if you’re not spending any more on a credit card, not being able to pay your card on time means that the balance will grow faster than people are able to keep up with.
If your credit card is the default way you handle emergencies, work on building an emergency fund. Your emergency fund should cover no less than 30 days of your basic necessities – food, transportation, utilities, housing and health. Assuming you lost your job tomorrow, this fund would give you at least a 30-day buffer to fund your life without the use of a credit card.
The complexity of having to manage other debts like car loans, student loans and mortgages, can potentially be muddled even further when combined with credit card debt. This makes detangling and governing your finances extremely challenging. If you have any other forms of debt, strongly consider clearing them before signing up for more credit.
Shift The Enthusiasm From Accumulating Points To Wealth Building Investments
I will admit that I also used to be enamored with the idea of getting points just for spending on my regular purchases. Credit card marketing does a great job of making you feel like you are missing out if you’re not gaining all these seemingly free rewards for flights, hotels and cash back.
But once I stopped paying attention to my credit card points and how to game that system, I shifted to learning how to invest in real assets such as dividend producing exchange-traded funds, real estate investment trusts and more recently researching interest-bearing options like high-yield savings accounts and certificates of deposits.
Imagine if we were as excited about investing as we are about credit card mileage. How much more could we all save? So, I showed my students some real-life numbers. In the first four months of 2023, I calculated how much I earned in credit card bonuses and it amounted to $154.21. But the amount I accumulated in passive income from transferring my enthusiasm to investing resulted in $10,005.27 in investing.
While I don’t expect you to quit credit cards altogether, I do challenge you to honestly assess if they are truly improving your ability to become financially independent in the long-run.
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