Update: I have changed my mind! I tried switching to a debit card and realized I was wrong. I’ll leave this article up (for transparency), but if you want to read my updated advice on Rewards Cards, check out the new article: How Reward Credit Cards Lead to Accidental Overspending
Q: Is it worth it to use a credit card for normal daily purchases, pay it off in full every month, and collect the rewards?
A: Only if You Can Handle it… And Most People Can’t
I’m so weird. Like, super weird. I am a super analytical, over-thinking, extra weird, math nerd. I love math. I love numbers.
I’m not normal. That’s why I like to do what so many financial gurus don’t recommend: I make all my purchases on reward credit cards and pay the balance in full every month.
But, this method is not for everyone. In fact, it is generally a bad idea for almost everyone. So, before you decide to move that debit card to the back of your wallet and walk away from cash, here are my thoughts on whether using credit cards for everyday purchases is a good idea.
Lower Friction Means Higher Spending
The research pretty much all agrees: using credit cards generally leads to higher spending than cash. The results are a bit less clear when comparing credit cards to debit cards… but, at least you can’t spend money that you don’t have with a debit card.
The study most often cited on this topic was by Dun & Bradstreet that found that consumers using credit cards spend 12%-18% more versus cash. There’s another bit of research from fast food that claims that diners using cards spend 40%-50% more. However, that study is from 2004, and a lot has changed in the way we shop and dine in the last 15 years.
There are two ways that increased spending can hurt your finances: spending more than you can afford and budget creep. Before you ditch cash, you need to make sure that you won’t fall victim to either. Or both.
Spending More Than You Can Afford
The most obvious pitfall of switching to credit cards for everyday purchases is that it is possible to spend more money than you have.
If you are using Dave Ramsey’s famous cash-envelope budget system, or sticking purely to a debit card that the bank has instructions to never let go into overdraft, then you are pretty unlikely to spend more than you have.
But, if you are using a credit card, it is fairly likely that the credit limit is higher than your checking account balance. You may start the month with the perfect intentions to not spend more than a specific amount. But, the only thing stopping you from going over your budget is your own self control.
Not everyone has that kind of self control. Very few people do.
If you don’t have that kind of self control, then the risks of spending more money than you have outweigh the potential rewards of getting a bit of cash back.
Right now, the average interest rate on credit cards in the US is over 17% according to the CreditCards.com weekly report (published October 2, 2019). Most credit card cash back programs pay you back 1%-1.5% for your purchases. So, you don’t have to carry a balance for long before any interest you pay eats up all those rewards.
If there is any chance at all that you’ll spend more than you have, then credit cards are not for you. Just stick to cash or debit.
This one is more subtle. It takes a bit more self-reflection to determine if you have it.
Using a credit card for daily purchases isn’t just a bad idea if you can’t spend less than you make. It is a bad idea if you can’t continue to reach your financial goals.
As I’ve written about before, your financial goals should be more than to just not hit rock bottom every month. You should have dreams and aspirations that go well beyond just getting by.
If you use a credit card for daily purchases and you are not incredibly careful, you can slowly and quietly sabotage your financial goals, without even realizing it. Let’s look at two examples to show how budget creep works.
Example 1: Cash Envelopes
Part of what makes Dave Ramsey’s envelope system so successful is that you “put every dollar to work for you”. You “make every dollar behave”. If you want to keep your grocery spending to $300 this month, then you put $300 in the grocery envelope, and when it’s gone, it’s gone. You cannot spend even $301.
In fact, because most people start to get nervous when their cash envelopes start to get empty, they often spend a bit less than budget each month. So, if you put $300 into a grocery envelope this month, you may get by on $280, just to be safe.
If you have five envelopes in your system, and you end the month with $20 left over in each envelope, then you just saved $100. You can take that straight to the bank and deposit it in your savings account, and replenish your envelopes with new money for the new month.
When you use cash, the tendency is for your spending to creep down. But, when you use a credit card, the tendency is for spending to creep up.
Example 2: Credit Card
If you use a credit card and you have the best intentions to only spend $300, you can totally spend $301 without breaking any systems. You don’t have to rob another envelope to go over by $1. Or $5. Or $50. Then, before you know it, you are regularly spending $400 on groceries every month.
That extra $100 per month turns into $1,200 per year.
And, if your grocery budget creeps, it is possible that other budgets start to creep too.
Even if you are incredibly disciplined and keep your total spending to your budget every month so that you can pay off your credit card in full, budget creep can stop you from super-charging your finances.
The situation get’s even more serious when you compare the two examples. In the envelope system, you could have saved $1,200 in a year. On the credit card system, you may have spent an extra $1,200 per year. Now, we’re talking about real money! Budget creep can lead to a $2,400 swing in your financial situation without you even realizing it!
There is no rewards program on the planet that is worth $2,400 per year.
Most financial gurus say stick to cash and debit cards.
Most consumers say that if they can pay their credit card off every month, there’s no harm to getting the rewards.
Before you ditch cash and jump to credit cards, I would ask that you go beyond just being able to pay off your card in full. Make sure that budget creep doesn’t eat up the value of any rewards you might get.
If you’re the kind of person that checks your balances & transactions every day and you consistently come in under-budget, then maybe credit cards with rewards are for you.
I hope this has been helpful! I welcome your comments with your thoughts and questions. And, don’t forget to subscribe to the newsletter to get notified whenever a new article is posted.