Cash Over Credit: Why Credit Cards Will Always Cost You More

cash-over-creditAfter my last post pledging no credit card offers on Money Spruce got some attention, I thought it important to back up my position with why I don’t like credit cards: it will never work as well as cash for most people. That’s truly what I believe. Here are my reasons why:

1. The most obvious: you can’t spend cash you don’t have. It’s nearly impossible to go into debt if you’ve only paid for things with cash and never drew on a line of credit. It’s actually kinda insane to think about, mostly because credit and loans have ingrained themselves so deeply into our financial culture now.

I’m not saying all forms of loans are bad (most people would never be able to buy a house without one), but this credit culture has led to astronomical amounts of debt in this country. As of March 2011, the total revolving debt in the U.S., 98% percent of which is attributed to credit cards, stands at $796.1 billion! Would we be better off if there was no such thing as credit cards? Without a doubt.

2. There’s evidence that people spend more with credit. Research has shown that we spend more when using credit than using cash. Whether you’re in credit card debt and carry balances or not, this is bad news because credit cards are costing you more money either way.  Many people cannot control their spending on credit. While it seems like a simple issue to examine, it actually involves complex psychology. Retailers know that customers will spend more money (and money they don’t have) if they accept credit cards. Dave Ramsey points to a study that shows McDonald’s customers spend 47% more with credit than cash. If this wasn’t the case, why would retailers choose to give a percentage of their sale away in credit card fees? Even those that can control credit card use can easily find themselves suddenly overspending and not able to pay balances, such as is the case when there’s income loss or an emergency.

3. It’s impossible to track credit balances as closely as tracking cash. There are so many things about using credit cards that make instantaneous tracking harder. Credit card balances don’t show up right away. When they do, you typically need internet access to see them. If you don’t use online banking, it may take a month to see your balance. Sure, using is great to track your spending, but Mint works only after you’ve already spent your money. Wish cash, you simply need to peer into your wallet and see what you have. If you don’t want to overspend, it’s as simple as setting a max on the amount of money taken out of the ATM (like with the envelope system).

4. There’s always a threat of fees, even for the best credit card users. Credit card companies and banks make a ton of money from issuing credit cards. Yes, they make money by taking a cut from merchants, but they do a booming business on interest charges and fees, too. There’s a long list of fees that these companies charge. While some customers are constant victims, there’s really no way to 100% safeguard yourself from these fees. There’s really no fees you can be charged simply by using cash. Yes, you are subject to checking and savings account fees, but you’ll have these accounts, credit card user or not. Adding credit cards simply increases the exposure to additional fees.

5. Many users are drawn in by special offers, rewards, and other benefits that aren’t even that valuable. Sure, rewards for free flights or gift cards are great, but these rewards are easily negated if any fees or charges are levied against you. I’ve fallen for these rewards, and I guarantee I’m still in the red from when I carried credit card balances. Let’s face it: the rewards offered aren’t that amazing anyway. Most cards offer a few percent back on purchases (think 2%), which is hardly anything to get excited about. If you spend enough on your credit card to get a worthwhile amount back then you might be spending too much to begin with!

I know there’s  examples of people who manage credit cards perfectly and get great benefits from doing so. Others suggest they are better with budgeting when it comes to cards rather than cash. I’m not denying this is possible, but I don’t think this is the case for the vast majority of credit card users. I welcome any research or statistics that prove otherwise.

Are you capable of controlling your spending with credit cards? Have you tried only using cash?

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photo by: MoneyBlogNewz


  1. I just wrote a similar article…and I honestly like your pledge of never promoting a credit card on your sight.  Though I do have to disagree with one aspect of this post, and that’s about tracking credit card expenditures versus cash.  I actually have a really hard time tracking cash, I dont even bother getting receipts for a lot of smaller purchases, and a few bucks for a coffee or in a vending machine can be easily forgotten.  My credit card statement is great for remembering how i spent my money, though I will admit I tend to spend more with it!

    • Thanks, Justin. I read and enjoyed your post this week (and
      coincidentally had this one lined up already, too).

      I knew that the point you’re disagreeing with was the one that most
      people would point out. To clarify: I think it’s easier to track
      credit card spending after the purchase, but I think it’s harder to
      keep tabs on what you’ve spent at that moment. It’s a tradeoff, but I
      think it’s more useful to know how much I’ve spent say on one Saturday
      afternoon out at the mall (where I can just keep track of cash in my
      wallet) versus looking back at what I spent by checking my credit card
      statement the following day.

  2. I just use receipts to track everything.  Every night my husband enters our receipts into the budget.  We are up to date on the budget every day.  I think credit card (or debit cards) easier to track because I can split the receipt into different categories and I don’t have to worry about always making sure I have enough cash on me.  I can’t imagine going to Costco with cash.    When I buy something on a credit card exactly what I spend comes out of the budget.  I don’t have to worry about change.  At the end of the month we don’t have to figure “oh well, I have $100 in cash in my wallet”. 

    We put everything on our Amex for the cash back.  EVERYTHING.  I know you say that the 2% isn’t worth it, but for us it really is.  It pays for our Disney trip every year. 

    Anywho… All of this can be accomplished with a debit card.  Does the research about spending more put debit cards and credit cards into the same category. If not then it’s not about the use of a card instead of cash but about knowing in the back of your mind that you don’t have to pay off the credit card bill.  Which for me isn’t a problem.  But anyone who has ever had a problem with credit card debt should avoid credit cards at all costs. 

    • Thanks for the very thoughtful comment, Ashley. It sounds like you have a very good handle on your system, and that’s great. Everyone has their own systems that work.

      My point in this article is that, in general, Americans clearly suck at using credit.

      My point with cash back is this: let’s say you get 2% back but, because you’re using a credit card, you spend an extra 5% throughout the year than you would if you relied only on cash. Right there your credit card rewards are wiped out and then some.

      I should probably note that I typically mean to use”cash” and “debit cards” interchangeably, although they aren’t explicitly the same. I don’t expect anyone to walk into Costco with $300 cash on a regular basis.

      With your point about debit cards, I definitely think it’s worth some research to compare to credit cards. However, since debit cards can’t draw on lines of credit, you can’t spend money you don’t have, which I think is the most important factor.

      • Interesting.  When I hear someone say that you should go all cash I assume they mean actual cash.  Like dollar bills.  Not a debit card.  I thought they were saying that watching the actual cash leave your wallet really makes you think.  And maybe some are saying that. 

        But I can see someone thinking, oh I don’t have the money in checking but I will have it by the time the bill comes and then they don’t for a variety of reasons.  Then, boom, they have credit card debt. 

        • I see your point here. I’ve heard both ways. Dave Ramsey says debit cards are okay, but not credit cards. I think it’s nearly impossible to use literally only cash, so I’d put debit, checks, and cash all in the same category, but I will concede that sticking to using only cash would be the most effective since it’s the most tangible.

  3. I couldn’t disagree more with your notion that we would be better off without credit cards. Credit cards are an easy target, but as with any type of credit, they need to be used responsibly. The real problem is that many of us have no restraint when it comes to making purchases; we will always find a way to buy what we want when we want it. Because of this, many Americans are overspenders and undersavers, with an unmatched ability to get into debt. I’d argue that this instant gratification mentality needs to change because it is the root cause of our skyrocketing consumer debt.

    • I’m curious why you think we’re better off with credit cards. I agree with your points about having restraint, but I don’t think the points you make reinforce that we’re better off having credit cards.

      • A car is great when it’s in the hands of a responsible driver and extremely dangerous in the hands of an incapable driver. My point is that credit cards are the same way; great when they are used as they are intended to be used (never carrying a balance, keeping an eye on spending). Among other things, you get the convenience of paying 20ish days later without any interest. I agree with many of the cons you list but the most are a direct result of correctable consumer behaviors, and not a problem with credit cards themselves.

        Obviously, not everyone uses credit cards properly–many people are bad at managing finances, holding off on purchases, and in some cases, both. Consumers just have to become better financial managers. For example, not buying the iPad 2 until you’re certain that you’ll have enough money at the end of the month.

        • Morris, 
          Although I do agree with inherent duty of choice, would you give drugs to just anyone?  Of course a car is a reliable, trusted tool that has been used for the past 90 years.  Have they caused deaths, pain, and financial ruin?  Sure, but not enough to get rid of them.  Credit cards on the other hand are more like Oxycontin or Vicodin.  Though, used in the right way, these drugs can be highly beneficial.  They have a tendency (which is growing) not to be used in the right way.  I know some people who smoke pot and seem to have complete control over the substance.  This is not the norm!  Like wise, while some have mastered the credit card (maybe your are one of these) most have become the slave.  Credit card companies have a perfected the equilibrium price for each consumer.  They know the specifics on what each person can barely afford.I think what the author and Jeffrey Trull are trying to get at is simply, the economic benefit would out weigh the economic cost.  I know I know……. it would be complete hell if people had to wait one more month to  buy an I-Pad or HD-TV.  However, with the $ saved on not paying interest, they would be able to buy those products upfront.  Most people (myself included, age 25), are not responsible enough to have the line of credit which has been made available to them.  

          • I wouldn’t give drugs to just anyone, but I don’t think your
            characterization is valid. There certainly are some people that have no
            business having a credit card and people that shouldn’t have Vicodin.
            But I wouldn’t group these two together. Even if you suck at credit
            cards now, you can learn to use them more responsibly; I would argue
            that if you suck at using drugs properly, you can’t become a responsible
            user of Vicodin. Case in point: the US is really the only place where
            consumer debt is a major problem-consumers in other countries have been
            able to master the use of credit. What makes us different? Americans are
            overspenders, which is a correctable problem. The recent recession served as a wake-up call that helped
            to bring the national savings rate up to about 5% as of the beginning of
            this year (still too low, but better than the 0% it was a few years
            ago). Overspending is the problem, not credit cards.

            Used properly, you would never have to pay any interest, so saving
            money on interest shouldn’t even be a factor. Maybe I’m being a bit
            naive, but I think most people, especially younger people like you who
            haven’t developed entrenched bad spending habits, can absolutely become
            responsible credit card users. For
            the record, I’m 24, so it’s not like I have decades of experience.

  4. Here in the UK, Credit card companies can be found liable if good brought using a credit card are faulty.

    Sure; you have various legal protections requiring the retailier to reimburse you for faulty goods, and that’s always going to be your first port of call….but since I seem perfectly capable of managing my use of credit cards (ie only for large purchases and I *always* immediately pay off the entire balance after using them), that protection along with the silly rewards programme my card offers means it makes sense.

    It sounds pretty horrible, but I view it as all the irresponsible folks lining the pockets of the card companies are subsidising me.

  5. timwarnock says

    Just read this article and thought I’d share — I’ve been cash-only for many years, zero credit cards or any form of credit (paid off all student loans, car payments, etc).  I had been traveling the world for several years and had recently moved to NY (for a job with the New York Times).
    I can’t even tell you how amazingly freeing and liberating it is to be cash-only without any debt/loans/etc — I spend only what I can afford to spend and my savings have gone up and up.
    However, I just today learned that I no longer have a credit score, it used to be somewhere around 800, but without an active line of credit/debt the score disappears.
    I have enough savings and investments to pay a 12-month lease agreement up-front in full, but I’m finding I cannot rent a place in NYC without paying a multi-month security deposit … this is the same treatment I’d get if I had bad credit. Financial prudence apparently comes at a cost as there are many sectors in business that incentivize spending via credit, and unfortunately this is such the norm that you’re occasionally penalized.
    The hard lesson I’m learning is that credit scores are not “savings” scores, which I imagine would be a better metric to determine whether or not a person is financially solvent — which I am, and then some, but I am sometimes treated quite differently.
    That said, in my experience a cash-only lifestyle is still very very worth the trouble

    •  @timwarnock Thanks for the comment and your insights, Tim! That’s disappointing to hear about your credit score problems, but I’m glad to hear the rest is worth it!

      • timwarnock says

         @Jeffrey Trull To follow up, I spoke with a leasing agent and they were able to make an exception 🙂
        I guess the point is, there’s a handful of specific areas where living completely free of credit and debt will cause some annoyance, for no other reason than you will be the exception to the norm; and many agencies (from cars to housing) will have to treat you as an exception.
        If we consider that occasional moment of explaining yourself to businesses who asked for a credit report, it is in that moment more work than had you been living in credit/debt. In that one moment the norm of credit spending is easier than being the exception.
        However, those moments happen a few times throughout a year. But by living free of credit, life is easier every single day. You save time every day, you save mental energy every day, you can more easily budget and invest; doing otherwise and spending from credit you run a very real risk of overspending, and you lose time and mental energy budgeting your life through credit spending.
        I understand there are arguments to be made for credit spending, but it does seem that the claims of convenience of credit (and even “rewards”) stand in stark contrast to the very real debt and suffering that effects both individuals and institutions.

  6. I think after years of using cash/debit (and loving it) we’re going to be screwed now that we’re thinking of getting a mortgage. Good luck finding a bank that will treat you as the “exception” in this environment, the way timwarnock’s leasing agent did.
    Thought we’d just suck it up and go buy some bubble gum on a brand new shiny card to “play by the rules”; realizing that it could be easy to be sucked into spending more. But the bank issuing the card just pulled our credit from the same reporting bureaus (probably dinging us in the process). This is where we may find someone to treat us as an exception: a credit union? smaller local bank? The grocery store offers a credit card. Stay tuned…
    Oh well, if we’re going to be true to the cash-only mantra, we’d buy our house that way, too. Maybe 30 years from now. At that point, maybe we should just get a reverse mortgage.

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