Do You Spend More with Cash or Credit?

By Craig Ford. Last updated 4 June 2014. 13 comments
Photo: kzenon

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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.

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Guest's picture

Thank you, thank you for a thoughtful articulation of why spending using your credit cards can be a meaningfully positive personal finance choice! Nice job. I would also point out that you made money on float on your bank account from the free 30-60 day loan the credit card gave you every month before you paid your balance in full.

Guest's picture

In our situation, we live on a budget w/ fixed amounts for categories. It would not matter if we used credit cards or cash, we would spend the same. That said, if we were not disciplined, and used credit cards as fall-back for when cash was limited, we might be tempted to overspend w/ either or both.

Try this experiment - Put your credit cards away for a month, withdraw a fixed amount of cash for specific purchases, and use only cash for a month's worth of daily expenses. If - and ONLY if - the credit option is totally done away with will you know for sure if you spend more or less w/ cash. LIMITING the options forces one to be very very careful about spending.

This is really more of a "budgeting" issue.

Guest's picture

So you only spent $583 on "visits to the grocery store, dining out, and other miscellaneous spending?" That seems a bit hard to believe. If that's not what you meant then please clarify...

Craig Ford's picture

@Slug - yes, I guess the float would make a little difference, but with these numbers and low interest rates I'm guessing it wouldn't pay off.
@NCN - We don't actually buy most things with credit. Anytime we go to the store we shop with cash. I think that does help limit overspending with credit.
@Matt - yes that is exactly what I meant. We have family credit card spending guidelines. We only use the cc for previously agreed purchases over $100. Thus, when we eat out or dine out we typically pay cash.

Guest's picture

@Craig Ford - In that case I think your spending rules invalidate your comparison on whether you spend more using cash or credit. For a "true" comparison on whether you spend more using CC or cash, you'd have to be using them for the same types of purchases in the same places. For example: over the course of one month, use only cash to buy groceries - then over the course of the next month, use only credit to buy groceries. Something of that nature.

Guest's picture

I agree w/ Matt. Unless you do a month w/ cash (or even a year) and then a month (or year) w/ credit cards, you can't really compare. (As as side note - I lived for the first six years of my married life using credit cards. I was broke, in debt, and didn't have any financial stability. Now, I've lived for nearly six years w/ out them, and I'm debt free, buying home, am investing, and am on solid ground. The two major changes? I started living on a budget - and I stopped using credit cards.)

Guest's picture

I don't know what you mean by "it wouldn't pay off". It's an arbitrage situation where you're given a free loan and make nominal interest on it before paying the card off on the due date.

Guest's picture

I actually did the experiment all CC->all cash.

My family actually went from all CC to cash/debit card and budgeting (but only budgeting for personal items, not food or household). I use to track ALL the money. So I know exact spending levels before and after, averaged over a year.

The difference was over 15%. And we are reasonable, stable, financially responsible people with no compulsive spending habbits. After I realized the numbers - 1-2% cashback( or amex points/tickets) ,and all this nonsense about free 30 day loan - are simply a bad joke. Bank was having its money back TENfold, at least in our case.

Guest's picture

Debit card is not cash. It is plastic just like your credit card. This entices article, your experiment is unsound. Get back o us when you compare plastic with green cash.

Guest's picture

Comparing plastic to plastic? Yeah ok, sorry to bust your experiment but your comparing plastic to plastic. How about experimenting with real cash and leave out the monthly expenses that must be paid, thanks.

Guest's picture

Yes, CC to cash savings would be much better, but debit card is still much better than CC. You have to watch your corresponding account all the time (assuming you are not stupid enough to link it to your main bank account), and you can't overspend. It all makes it much more personal/connected to your money.

When my family went from CC to debit - spending went down 15%, averaged over a year. With no real sacrifices or changes in quality of life. With all cash the difference, I believe would be even more staggering. But all cash is very impractical in 201x, so that would be change in life quality.

Guest's picture

What card do you have that gives you 2% back?


Guest's picture

I spend less with cash. I was using credit cards on everything a couple of years ago and moved to cash. I pay off the balance every month, but even then i spend more with credit card. Cash is more real to me and it does affect my spending habit.