Do you pay your credit card balances in full every month? Have you been using credit cards for more of your purchases, like groceries, figuring you’re ahead of the game because of the rebates, miles, or other perks? According to researchers quoted in a Washington Post article, you’re overspending. Professors from MIT, Harvard, and Britain’s Warwick University all have found that no matter how people use their credit cards, paying with plastic instead of cash makes people spend more.
There have been numerous similar studies over the years, all coming to the same conclusion. Still, I have mixed feelings about such research. On the one hand, I readily accept that there are many occasions when paying with plastic would encourage people to spend more than if paying with cash, like buying a restaurant meal. However, I do not agree with those who say no one should use a credit card. Just because someone gets into a car accident doesn’t mean everyone should stop driving.
One problem credit cards create is that it’s easy to lose track of how much has been spent. When the bill arrives, the total due comes as a shock. That even used to happen to me, and I teach about this stuff! But that’s because I was recording and categorizing my credit card spending after the bill arrived. Now I download credit card expenses into my budget (we use Quicken, but this can be done through a lot of tools, including Money, Mint.com, Geezeo.com, etc.), enabling me to check how much we’ve spent in various categories, including spending on credit cards, before the credit card statement arrives. If you don’t use an electronic budget tool, just write down credit card expenditures in your check registry or a separate registry.
The rules of the road for credit cards are to use them to buy only what you planned in advance to buy, record your credit card expenditures as you go, and pay your balances in full every month.