Plastic or Cash?

With all the talk about the dangers of credit cards, it might be easy to decide to bury your Visa, MasterCard, American Express or Discover cards in your back yard and just stick with your debit card instead.

Before doing so, you should be aware that studies have indicated that regardless of whether you use a credit card or a debit card, you still spend about 12% more than you would have if you were to use cash or a check.

This fact should bring home several implications, including the following:

  1. If you use credit cards, and you pay off your balance in full every month, you probably think your pretty wise for taking advantage of the credit card companies. After all, using a credit card is generally more convenient and more secure than carrying around cash. After all, with credit cards, you don’ t have to go to the bank to withdrawal cash, you don’t have to reorder checks every 6 months to 2 years, and you essentially get an interest free loan on your purchases if you pay them off in full with the next bill. However, be aware that if you’re an ultra credit card user (perhaps making $2,000 or more in credit card purchases each month that you pay off with the next bill), you’re likely spending an additional $250 or more every month in real money because of the psychological temptation to purchase more expensive items and to do so more often due to the convenience of the plastic in your purse or wallet.
  2. It gets much worse if you’re using plastic when you go out to eat. Think about it! If you walk into a restaurant, all of your senses combine against you as they try to communicate this one issue: satisfy us NOW! There are smells; there are often sounds of food cooking; there are brightly colored menues; and then there is your stomach growling at you. That’s why, when you use a credit or debit card in a fast food or other restaurant setting, you’ll probably spend upwards of 30% to 40% more than if you had brought in cash. It’s no wonder, then, that when McDonald’s began accepting credit cards, their average purchase when from the $4 range up to more than $7!!!

I’m not suggesting you ditch credit cards. As I mentioned (and I truly believe), credit cards are safer and more convenient to use than cash, not to mention that their proper use can help us to build a solid credit history, especially important in advance of a large purchase on credit such as a home or car.

However, I do believe that too many people use their credit cards without setting and sticking to actual spending limits. That’s my challenge to all of us: establish your spending limit long before you enter a store or restaurant and stick to it. Otherwise, you ought to consider putting your plastic on ice.

Todd Christensen
Director of Education
www.NationalFinancialEducationCenter.org
[email protected]
www.facebook.com/MoneyDay2Day

Image: Francesco Marino / FreeDigitalPhotos.net
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    To answer your question, Nigel, the credit bureaus tend to avoid suggesting any specific level of credit usage that would maximize your credit score. Some credit educators say that using more than 50% of your credit at any one time (even if you pay off the entire balance every month) is too much. Many others would say (and I tend to agree) that using more than 30% of your credit limit may not only impact a credit score, but it’s also just a good idea because it doesn’t tie up too much of your credit limit in case you need it for true emergencies. Credit bureau and Fair Isaac Company (FICO) representatives I’ve heard speak about this question often give the generic response: “the less of your credit you carry as a balance, the better.”
    I’ve heard some so-called experts actually suggest that you should purposefully carry a balance on your credit cards in order to get the best credit score. That is not seeing the forest for the trees. My wife and I pay off our credit card EVERY SINGLE month (probably using just 5% to 10% of our total credit limit), and we both have excellent credit scores.
    The key to excellent credit is 1) making all credit payments on time every month, 2) paying down (ideally “off”) balances on credit accounts.
    Good luck! – Todd

    Reply

    Just finished reading the article, just a quick question…Do you have a guide or advice on what percent of your balance or credit limit you should use?

    Reply

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