Credit Cards are Bad for Your Financial Health: It’s Science

November 30, 2011 by  
Filed under Debt and Credit

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.

Of course, my blogger friends believe that when used “responsibly”, credit cards are an awesome financial tool that provide equally awesome benefits to consumers. My arguments against them are two-fold.

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.


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13 Responses to “Credit Cards are Bad for Your Financial Health: It’s Science”
  1. Kurt Fischer says:

    I’m with you 99%, but suggest your treatise should include a description of the consumer liability differences between credit and debit cards:
    CREDIT CARD: Cardholder is not responsible for any charges made after notifying card issuer of missing card if notification is made within a reasonable time–usually 30 days. Technically cardholder is responsible up to $50 for charges made before notification, though even that liability is almost always waived.
    DEBIT CARD: Consumer is liable for up to $50 if notification of missing card is made to bank within 2 days. If notification is made after 2 days, consumer is liable for up to $500. Consumer’s liability is UNLIMITED if bank is not notified within 60 days after bank statement is mailed showing fradulent card use.
    In short: Consumer liability with a Debit Card is far more than with a Credit Card.
    Thanks for the post.

  2. kitty says:

    As before, you are misinterpreting the studies. Will you ever understand that “people as a group spend more on the average” isn’t the same as “everyone spends more” or even “people who pay off their balances in full spend more”?

    Hint: an average person in the US carries a balance… “Responsible credit card users” don’t carry balances.

    I do suggest that you LEARN SOME STATISTICS. Hint: looking at standard deviation and distribution in these studies (if listed) would be useful. Finding out a study that looked at payment habits (balances vs in full) and correlated this data with spending would be useful too. Having a study that only looks at buyers that pay the balances in full would be ideal.

    Why is the concept so difficult for you to grasp?

    BTW I wouldn’t use habits on Black Friday or Cyber Monday as indicative since most responsible shoppers don’t bother with those. Look up “selection bias”.

    “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.”

    This isn’t at all what we are saying. What we are saying is that you are misinterpreting the study results either because you don’t understand statistics at all or because you don’t want to analyze the data as you want to interpret it in the way that helps your arguments.

    • Kitty: I am not misinterpreting anything. Your arguments seem to be premised on the concept that each individual performs better than the group. It’s like being in Lake Wobegon where everyone is above average. It’s not just statistics. If you read the actual study reports instead of going instantly into rant mode, you might understand the psychological reasons why people spend more with credit cards, even those who do not carry balances. Not everyone is as self-aware as you consider yourself to be.

      • kitty says:

        TML – HELLO?????? How is saying that RESPONSIBLE USERS perform better than a group in which OVER THAN HALF of people are IRRESPONSIBLE is saying that everyone performs better than a group? NO, I am saying that a large minority performs better than a group. You are saying that EVERY individual performs like a group or below.

        My argument isn’t premised on the concept that each individual performs better than the group. My argument is premised on the concept that responsible credit card users perform better than a group that 1) contains both responsible and irresponsible users and 2) in which the number of irresponsible users presents the majority: since over half of the people carry balances – the number also based on the studies – the responsible users constitute less than half of the total users.

        Oh maybe I misunderstood your studies? Maybe they only looked at people who pay their balances in full? Or maybe I am wrong about the majority of people in the US carrying balances? Pray say so because unless you do, your reference to Lake Wobegon is nothing than a red herring for the simple reason that people I refer to constitute less than half of people in groups the studies looked at.

        I read psychological reasons but don’t find them convincing.

        “I am not really spending money as it’s plastic” would apply to both credit and debit cards assuming one has always paid one’s balance in full – in both cases one needs to have money.

        “it’s OK to spend more since I’ll pay for it later” this only works until you see the first bill. Parting with a large amount of money at once is fairly painful, and for someone who pays one’s balance in full seing this large bill would be a huge deterrent for the following month’s purchases. I don’t think your studies considered this.

  3. kitty says:

    TML, here is some simple arithmetic for you to show why your interpretation of “science” doesn’t hold water and why the argument how “Lake Wobegon” is irrelevant here:.

    100 credit card users, 50 carry balances (irresponsible), 50 don’t (responsible).
    50 with balances – let’s assume 20% overspending
    50 without balances – 0% overspending

    Average that your studies would show for these group of people: 10% overspending

    But 50% here don’t overspend which goes against YOUR CLAIM that everyone is bound to overspend since your post is obviously directed towards responsible users.

    Here by the way my estimate was very conservative since I assumed only 50% are irresponsible yet we know that it’s more than that. We also know that some people overspend by a lot more, especially during holidays.

    I can’t believe you don’t get it because it implies the lack of knowledge not just statistics but also elementary school math.

  4. Holly says:

    Well, I always use a credit card (even for a soft pretzel) since I feel as if I spend cash way too easily. However, I do believe that if you decided to pay a clerk $400 for an electronics purchase with a wad of $20 bills, then that is going to feel a whole lot painful than using the cc.

    But when the alternative to a plastic cc is a plastic debit card, I hardly think I would feel that same pain as with cash payments.

    Anyway, I am one of the responsible users and I put everything (except my mortgage payments, electric/gas, and trash disposal because they charge a fee) on my cc and pay it the day the statement shows up in my inbox (online).

  5. Rick Beagle says:

    It has been a while, but I feel like we have had this discussion before?

    Kitty has repeatedly extolled the benefits of using credit cards responsibly, quite convincingly I might add, but alas, I am still splashing quite happily in the shallow end of the thought pool on the matter having decided that spending within my means is and always has been the crux of the issue.

    I leave the exploitation and maximizing of credit card benefits to those that enjoy the game (much like coupons), but I do agree that it is far too easy for some to get caught up in the Christmas Spirit and easy credit.

    With all that said, Happy Holidays to you all!

    • kitty says:

      Rick – I have to say I missed talking with you. I don’t always agree with you, sometimes I do sometimes I don’t, but I have always found our conversation intellectually stimulating.

      As to credit cards – to each it’s own. I used to date one guy who never got credit cards because he was brought up to never borrow money from anybody. I most certainly respected it. This was by the way long time ago. The right way is the one that works for you.

      One thought I want to add mostly for TML. In our life we have many bills that we don’t have to pay right away – gas, electricity, telephone. But if we are still very cost-conscious when we use it, we don’t set the heating at 75 for the whole winter while opening the windows. There is no real difference with credit cards paid in full: for people who pay in full it’s just another bill and you are just as conscious of what this bill is going to be like when you make a purchase as you are when you turn your heat down in winter.

  6. jimmy says:

    “First, the primary “benefit” – cash back rewards – is mythical because the cost of these rewards is passed on to the consumer through merchant fees.
    . . .

    I like using my debit card, knowing that such use supports the 3% interest we receive from our rewards checking account.”

    Are you joking with that statement or are you that clueless??

    Where do you think the money is coming from to pay that phenomenal interest rate on your checking account? Haven’t you wondered why you must use the CREDIT/SIGNATURE option with your DEBIT card? It’s those same merchant fees!

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