Jul 302009

Got into a discussion with someone about the effectiveness of cash-back credit cards vs. cash.  If a credit card company is going to give you 3% back on a purchase, isn’t that better than buying with cash and getting 0% cash back?  Not at all.

You’re far more likely to spend more when using a credit card, so you’re not saving any money at all.  Look at what happens when  you spend 12-18% (Dun and Bradstreet report I can’t find primary source for) more when paying with credit card than cash:

CASH: $10 purchase.  No “cash-back”. [Completely ignoring situations where cash gets you better deals...]

CREDIT CARD: $11.20 (lowballing the 12% number).  Instead of getting water and lemon with your lunch, you went ahead and got the Pepsi.  Why not?  You’ve got credit…  Minus 3% “cash-back”.  $10.86

Now how is $10.86 cheaper than $10.00?  It’s not.  And that doesn’t include the risk inherent in cards (credit card companies jacking your rate up, “losing” your payment, dropping carryovers, etc.,).

What I found most interesting is that people are marginally more inclined to buy more when being exposed to credit card logos, even when paying with cash.

Dave Ramsey says that there is no responsible way to use a credit card, and answers “Can You Get Rich Off Credit Cards?”

Get Rich Slowly (about 50% useful) “Research Reveals Credit Cards Encourage Spending

Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior”
(PDF) Priya Raghubir and Joydeep Srivastava.  “Journal of Experimental Psychology: Applied” 2008, Vol. 14, No. 3, 213–225

The Realities of Spending” (PDF) (2003). Greg Davies. Argent, 2 (6), 22-27.

Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay” Marketing Letters 12:1, 5±12, 2001.  DRAZEN PRELEC1 AND DUNCAN SIMESTER

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