Why Cash Is King
Even When Paying Them Off Each Month, Credit Cards Can Be a Bad Deal

You're eating out at a restaurant, and after the main course, the waiter offers dessert and coffee. You're not really hungry, but who wouldn't want a bite of the brownie a la mode? So, you say yes and the kind waiter brings your dessert and coffee and adds $5 to $10 to your check. Perhaps you don't even consider the cost. You certainly don't open your wallet to see if you have enough cash to cover dessert. Instead you pull out a credit card and sign with little regard for the price of dessert. And you might even give yourself a silent pat on the back for earning some frequent flier miles or cash back on your dinner. The next month, your credit card statement arrives and the cost of dessert is buried in the balance, long forgotten.

If you have had that experience, you're not alone. Paying with a credit card simply doesn't "hurt" as much as pulling cash out of our wallets, and so we tend to spend credit more freely — even those of us who pay our entire balance each month. Consider the following statement and in a few moments, we'll tell you where it comes from:

"Research shows that consumers are more likely to spend more money when given the option to use a credit card versus using a checkbook or cash."

That's true. A number of different studies have found that a person will spend between 15 percent and 25 percent more when using a credit card, compared with if that same person uses cash in the same circumstances. And again, we're not even talking about paying credit card interest, which can be financially crippling.

Why would we spend more with a credit card, knowing we will pay the entire balance when the bill comes? For some reason, parting with cash in our wallet — even though it has the same value as the dollars we put on our credit cards — just feels more serious. That's real money leaving our hands. Yes, even in this increasingly cashless society, we respect physical greenbacks more than a promise to pay the same amount to a credit card company.

Other powerful forces are the rewards programs offered by many credit cards, either in the form of cash rebates, frequent flier miles or "points" for other services. We feel like we are getting something in return for our purchase. But consider this: Cash rebates are generally one percent or less. Frequent flier miles are generally considered to be worth no more than two cents per mile or a two percent rebate. So even if you spend just three percent more than you normally would, it's a bad deal. At up to 25 percent more — such as the $10 dessert and coffee after the $40 meal — it's a terrible deal. Your rebate on those ten dollars, whether in the form of cash or miles or other rewards, won't be worth more than 20 cents!

Here's a better idea: Carry only a debit card in your wallet, and use it only for necessary purchases such as gasoline, which is physically easier to buy with a card. If you have a credit card, leave it in a drawer at home and use it or your debit card, only for necessary purchases over the phone or internet, when it's hard to use cash. And if you think your "rewards" card is encouraging you to spend even a little extra money, get rid of it and stick with a card that offers no rewards and charges no annual fee.

As for that statement above in which we promised to reveal the source. It might sound like it's from a consumer protection agency, but it's not. The actual source is a company that sells credit card processing systems to merchants. Yes, they know better than anybody how to get us to spend money unnecessarily. The best antidote is to be vigilant about your spending, or stick to cash!