If you want to get financial bloggers or gurus worked up, there is no quicker way than by baiting them into an argument about whether it’s better to use cash or card to make your purchases.  

Summarizing the two opposing perspectives:

Card Advocates (ThePointsGuy):  Use your credit card! You’ll accumulate valuable cash back and avoid the temptation to spend the cash in your wallet, all while protecting your purchases!

Cash Advocates (Dave Ramsey):  Pay for everything in cash! You won’t accumulate interest, and you’ll avoid going into debt!

With loads of information and conflicting opinions – what’s the answer?  Are you better off paying in cash? Credit Card? Debit card?  Which one of our gurus is right?

Neither of them.

And… both of them.

A Brief History Of Cash

To solve this puzzle, we’ll start off by looking at the history of cash, and the shorter (though more complicated) history of cards.

Cash dates all the way back to about 600 BC.  King Alyattes (I’ll call him “Aly”) of Lydia is often credited with minting the first currency to serve as a medium of exchange for goods and services.  Aly made the coins from electrum and imprinted them with a recognizable insignia so his people would accept their value. Coins were supplemented by the lighter paper currency in the 1600’s, and the rest, as they say, is history.

It’s likely that Aly was more concerned with oppressing his people and retaining family power than he was appreciating the utter brilliance of this creation, but the concept is arguably one of the most important inventions in history – a physical representation of stored value that was widely accepted to conduct business.  No longer was it necessary to barter goods or services in real time. Rather, the fruits of your labor could be could be compensated with currency, and at a later time, you could exchange that currency for the fruits of someone else’s labor (or as it’s known today, “saving”).

The psychological effect was profound as well.  People could mentally connect the value of their work with something tangible, and over the course of the next millennia or two, “cash” became something fundamentally understood as food or water.

Currency allowed people to time-shift their purchases, and history was forever changed.  Money was a promise to both the buyer and the seller that each had produced something of value in the past or would produce something of value in the future.  From this, society developed more complex forms of money like loans, financing, and investments.

“Currency allowed people to time-shift their purchases, and history was forever changed.”

Before cash:
Grow carrot yesterday ->
Trade carrot for bread today ->
Pray you have more carrots for more bread tomorrow

After cash:
Grow carrot yesterday ->
Sell carrot for cash today ->
Spend cash on bread tomorrow, the next day, or in the future

The Evolution of Credit Cards

Cards, particularly credit cards, have a shorter history but grew from this same idea.  The early concept of paying for goods and services with a card dates back to the early 20^th century.  What started as a “Charge-a-plate” with a paper slip to record purchases in the 1920s, transformed into a single merchant “charge card” for credit at a single store in the 30s and 40s, and evolved into the revolving credit card by the late 50s.

It didn’t take long for retailers to realize that customers were willing to spend more in their store if they were given access to more money than they had with them at that given time.  Such was the birth of store-branded “charge cards” that you could use to buy more in a given store and pay later. From there, it certainly didn’t take long for banks to recognize that they could make the card concept available all nearly all stores via a short-term loan… and charge customers for the “privilege” and convenience of this loan.  Such was the birth of the modern-day credit card system.

But the grab for money out of this ecosystem did not stop there.  The banks also realized that the card payment systems could offer even more “privileges” to the merchants than it did to the cardholders.  Merchants no longer needed to worry about depositing cash, employee/consumer theft, and human error in the checkout process. Furthermore, they could reduce employee costs, sell to consumers via phone or internet, and command a higher average transaction price from consumers paying with card than with cash.  The banks began to charge merchants a fee to accept cards, which allowed banks to make money on both sides of the transaction.  

Ever wonder why a gas station sometimes charges you more for card than cash?  That is the gas station’s attempt to recover the costs of accepting cards in an industry where margins are razor thin.

To sweeten the deal, the credit card issuing banks began to offer “rewards” to consumers who used their brand of credit card.  “1% back on all purchases!” “5% back on restaurants this quarter!” “$200 sign-on bonus!” “Earn points and redeem for flights!”  The behavioral psychologists who designed these rewards cards had struck gold (for the banks). Consumers salivated at the prospects of “getting paid for spending money” and, as expected, their spending behavior on the cards went through the roof.  Websites solely dedicated to the idea of trying to maximize these rewards were created, and the rewards card became a symbol of financial sophistication.

The irony was that at the same time, the percentage of total consumer spending paid by card has grown nearly every year since cards were introduced.  So, too, has consumer credit card debt. The merchants and the banks emerged victorious.

Debit cards were introduced as a more convenient alternative to checks, and the card-based system evolved further.  The ubiquity of the card payment system was inevitable. Eventually, the card issuers came together under united “payment brands” like Visa and MasterCard, who began taking a small percentage of each sale on top of the banks’ fees.  American Express began marketing itself as a credit card system for the elite. The cost of the card systems grew further.  

Oh, and don’t be deceived.  These high costs of card payments are passed-on to you, the consumer, in the form of higher prices at checkout.  

Ever wonder why some gas stations don’t charge you more for credit?  Sorry, they’re not doing you any favors.  Rather, the stations have just “pumped” the cost of accepting cards into their price for everyone!

Today, we see an even stronger push for faster and more convenient electronic payments.  Nearly all smartphones allow consumers to just waive their device to authorize a purchase.  Merchants will encourage one-click checkout, auto-pay, auto-shipments, subscriptions, biometric payments, and micro payments, all under the guise of making spending easier.  The reality, of course, is that these marketing strategies drive up consumer spending and induce habit-forming behaviors.

Credit Cards: The Double-Edged Sword of Consumer Finance

The point of this (and yes, I promise there is a point) is that over time, developments in money have made it much easier and more expensive to spend our money.  Credit cards can be a great tool for finding online deals, minimizing the cash you carry around, and earning a few points, but it comes at the price (literally) of increased spending habits and higher prices a checkout at best… and compounding interest payments and perpetual debt at worst.

You are not immune to these effects.  Even if you’re financially responsible and pay off your card in full and on time every month, you’ve still spent more money than you would have if the card didn’t exist and you were forced into paying cash.

Don’t believe me?  There have been numerous studies and articles , like this this this and this, proving this effect.  Most find that, on average, customers spend 15% more if they have the ability to use credit card compared to cash.  

“Customers spend 15% more if they have the ability to use credit card compared to cash”

This is a staggering amount of money!  The effect was observed across income levels and geographic locations.  For smaller transaction sizes, people spend nearly 100% more when paying with card over cash for the same purchases.  McDonald’s acknowledged that customer paying cash spend a little over $4, and those paying with card spend $7. While there could be some other factors like income, there is no question that cards have a profound effect on customer spending habits.

People are not forthcoming about the magnitude of credit card debt, either.  One study found that 75% of people claim that they pay off their credit cards every month, but credit bureau statistics show that almost 50% of people carry a balance on at least one card every month.  This also means that 25% of people are not being honest with themselves about their financials (a figure that seems a bit low to me, but I digress)!

Credit card debt can be crippling to your finances.  Of those with debt, the average balance is $5,000, and 70% of those with a credit card balance believe they won’t be able to pay it off this year.  As a rule of thumb, if you carry this $5,000 “average” balance at 20%+ interest and make only the minimum payment, and the interest paid on the purchase will more than exceed the cost of the purchase itself.  Your $5 latte cost you over $10 by the time it’s all paid off. That is the dangerous power of compounding credit card interest!

As a rule of thumb, if you carry this $5,000 “average” balance at 20%+ interest and make only the minimum payment, and the interest paid on the purchase will more than exceed the cost of the purchase itself.

The studies don’t give specifics about debit cards, but the consumer has access his entire bank account balance at his fingertips.  One can only assume that debit cards likely increase consumer spending habits at least marginally. There are no lines of credit or interest payments, but some banks make it all too easy to overdraft and incur fees that way.

In fairness, there are some genuine benefits to using credit cards over cash.  

Most people will cite the rewards as the primary reason they use their card (though, astoundingly, 30% of people with rewards have never redeemed their rewards).  Rewards can be excellent, particularly for purchases where you are certain that you would not be paying more in cash.  Our family uses cards for these purchases regularly: my internet service that has a fixed price for the term, my car insurance that is locked in for a year, and my wife’s (Lady Centsei’s) grad school classes (which is an added bonus, since her employer reimburses by check each semester).  If truly fixed expenses like these can be paid by card at no additional cost, the rewards are a benefit.  

Additionally, cards give you the ability to charge back (dispute) unauthorized purchases, including those where the merchant fails to fulfill the purchase.

• Thief stole your card?  Charge back.
• Online merchant fail to ship and won’t refund?  Charge back.
• A call to cancel a service isn’t honored ?  Charge back.
• Annual gym membership paid in full, but the gym goes out of business?  Charge back.
• Store goes out of business before you can return your purchase?  Charge back.

You have the right to these disputes here in the U.S. and in most countries, and often your liability is limited to no more than $50.  It’s very important to know your rights.

Other benefits of cards can include bank-specific perks like travel insurance, ID theft protection, and credit score monitoring.  

None of these perks are worth it, however, if you end up paying interest and fees.  A single late or missed payment can wipe our years of rewards and bonuses.  

Cash or Card: How To Decide

There are pros and cons to both, but I hope this article can point you in the right direction.

To assist the decision making process, Penny Why’s would like to present her first flowchart of the blog to help you choose between the two:

That’s it.  If you have ever been late on a payment, had to pay interest, or are going to spend more because you have the card, pay cash.  You’ll spend 15% less and save a fortune on fees and interest.  Yes, this means most purchases should be made in cash.

Conclusion

Why should you trust me?  Well, if you’ve made it this far into the article, that’s a good sign.  In the Centsei’s mustache we trust! 

Seriously though, I’ve devoted my entire career to working in payments industry.  I know the credit card system inside and out, and I’ve seen firsthand the power of cards across nearly every sector of the economy.  

One time at a payments seminar, I heard it said that carrying a credit card is a bit like having a loaded gun in your house.  Yes, if you use it 100% correctly and nothing goes wrong, it can provide great benefit to you and can be an excellent tool. However, the reality is that you are 20x more likely to harm yourself or your loved ones than you are to use the tool as intended.  It’s OK to admit that this is the case, and it’s best to not bring the tool into your home at all. This blog is non-political, but I use this just as an example to demonstrate that, statistically, the majority of people come out on the losing end of the credit card game.  You likely will too.

If you’re on a budget and looking for just one trick to lower your expenses, cut up the credit cards and pay for everything in cash.  If you absolutely must make a purchase by card, pay of the balance immediately, not at the end of the month. It’s a hard habit to break, but I guarantee the impact of switching to cash on your finances will be monumental.  That physical feeling of parting with your money will make you a better budgeter in all aspects of your life.

This is an area of my own life that I could improve.  Until I got serious about my finances, I too would put everything on the card and get a sweet dopamine rush when I cashed in those rewards in $100 increments.  I always paid my cards on time and never accrued interest, but I’m 100% sure that my additional spending due to using cards was far more than I earned in rewards… by a long shot.  I did not “beat the system;” the system beat me.  Even now, I try to use my own flowchart and ask myself if I’d make a particular purchase (or spend as much) if I didn’t have the card.  Usually, the answer is “no.””I did not ‘beat the system;’ the system beat me.”

“I did not ‘beat the system;’ the system beat me.”

At some point during our journey in this blog, I may do a full month or even a year going cash only.  I’ll document the experience and share my thoughts. If I can convince Lady Centsei to do the same, the experiment would be all the better!

As a wise man once said:

Break free from the misinformation surrounding both cash and cards.  Understand that financial products can will be used against you by clever marketers to separate you from your money.  Accept that you are not immune to their psychological tricks. Retain your ability to make choices in the future by spending less today.

Your future self will reap “the rewards.”