Do You Spend More with Cash or Credit?
In order to answer the question "Do you spend more with cash or credit?" I decided to do a homemade experiment.
I’ve heard, and you probably have too, that people who use credit cards spend an average of 8-12% more than those who use cash. The problem is, as Get Rich Slowly points out, that study doesn’t exist. As a supplement, I’ll present an analysis of my own spending in 2010.
For context, I did a similar study in 2009 which concluded that I saved money by having a credit card. It depends a lot on how you use your credit card. Our family has pretty strict credit card guidelines (to avoid credit card debt).
In this test, I don’t try to anticipate or guess if you would spend more or less using credit cards. I don’t even try to guess to see if I will spend more this year. I’ve simply totaled up all my credit card expenses in 2010 to see if I really spent more using cash or credit. (See also: 6 Reasons Why Cash Is Still King)
The Cash or Credit Experiment
All in all, I spent $11,392 with my credit card. That includes both personal and business expenses.
In order to accurately determine if I spent more on credit, I decided that I needed to separate any expenses that could have been influenced by the fact that I was buying the item with plastic.
Items that were not influenced by the choice of a credit card or cash include things like health insurance premiums, disability insurance premiums, and plane tickets. My theory is that these are items I would have paid for regardless of how I paid (cash or credit).
If I had a cash-back debit card, I could have had almost the same result (as with the credit card) with the exception of the car rental coverage and foreign currency fees (see below). But there are other differences between a credit card and a debit card.
Expenses that could possibly be influenced by plastic include visits to the grocery store, dining out, and other miscellaneous spending.
Thus, my total spending that could have been influenced by a cash or credit choice equals $583.00. As you can tell, almost anytime I spontaneously shop, I use cash. However, there were a few occasions during the year (mostly on vacation) that I used the credit card for random purchases.
Factoring in Credit Card Rewards
In 2010, I earned $227.84 in cash back, 2% of my total credit card spending.
If I really did spend 12% extra (like you’ll hear quoted) on the $583 worth of purchases, then I would have spent an extra $69.84 with credit.
However, I spent about $2,000 overseas, and since I can get foreign currency via credit for 1% less than when I get foreign currency cash, I saved another $20 by having a no foreign-exchange-fee credit card. I’ve found that a 0% foreign exchange credit card can be one of the best ways to exchange foreign currency. Because of the exchange rate difference, if you travel overseas, you’ll probably spend 1-3% more by using cash.
And then there is one more consideration. I rented a car for five days, and I saved about $10 per day in insurance because I used the insurance offered through the credit card. Thus, I saved another $50.
The Final Determination
I saved more money by having a credit card in my pocket. Even if I did spend more ($69.84), the cash back, currency exchange advantage, and rental coverage made up the difference. I saved $228 in 2010 by using plastic.
Do you spend more with cash or credit? I really couldn’t even try to venture a guess. I would say if you have any credit card debt, then you probably do spend more with credit than cash. If you cycle everything through your credit card, then you might spend more with credit than cash. I’m not promoting or pressuring people to use credit cards, but simply pointing out that, if used responsibly, credit cards can actually save you money.