Credit Cards are Bad for Your Financial Health: It’s Science
I am one of the few credit card haters among personal finance bloggers. Most of my blogging colleagues advocate their use to gain cash back “rewards.” Many bloggers go beyond mere use advocacy – they promote acquisition of new credit cards because they are paid to do so.
First, the primary “benefit” – cash back rewards – is mythical because the cost of these rewards is passed on to the consumer through merchant fees. This is why the credit card companies use every means (legal and illegal) possible to discourage the use of cash in retail shopping.
Second, the use of credit cards is accompanied with an unplanned spending premium. Several studies have shown that consumers are willing to spend more for a product or service when using a credit card compared to a cash purchaser. The relative indifference to higher cost when using a credit card can easily trump any cash rewards.
More recent research casts further light on the issue. The Journal of Consumer Research has published a study entitled “Do Payment Mechanisms Change the Way Consumers View Products?”. The authors conclude that paying with a credit card increases the desire to spend compared to the use of cash in an identical purchase situation. This conclusion is supported by some interesting data from consumers themselves. Consumers who pay with a credit card make a purchase decision based on their perception of superior product benefits rather than focusing on the product cost. Conversely, a consumer who pays with cash is more likely to choose a product based on cost, even if that product offers inferior benefits. Stated more succinctly, credit card spenders are more indifferent to cost compared to cash buyers. (Here is a link to the study article.)
Some of you so-called “responsible” credit card users are now crying foul, thinking that this is just a research study that does not reflect the real world use of credit cards.
You would be wrong – again.
The Javelin Strategy & Research’s Online Retail Payments Forecast tells us what happened on Cyber Monday:
Frenzied purchasing periods such as Cyber Monday can cause consumers to throw cautionary spending patterns to the wind and take advantage of the “deal” phenomenon. Javelin’s study shows that consumers spend more money on a single online transaction using credit cards than when using other payment options, spending an average $82.10 with a major credit card versus $58.29 using a major debit card.
Credit card users spend more. It’s that clear and simple.
Credit card cheerleaders also like to argue that credit cards provide more protection against fraud. Really? I was intrigued by this statement, also from the Javelin report: “As credit card fraud rates are higher than debit card fraud rates, consumers should set alerts and monitor their accounts carefully during this holiday period.”
‘Nuf said about that argument.
I like using my debit card, knowing that such use supports the 3% interest we receive from our rewards checking account.
Debit cards > credit cards. It’s science.