Pretty much every commercial “blog” in this space help banks to promote the idea that you should get mile/point earning credit cards and put all your every day spend on them in order to earn valuable rewards. There is absolutely no doubt that for those who are disciplined enough in their spending patterns and have the means and ability to pay down their card balances in a timely manner this can be a lucrative means of amazing miles and points. But with the ease – at least in today’s environment – of manufacturing spend in order to meet card sign-up bonuses and earn on-going rewards, is there a case to be made for going all cash in your regular spending?

creditcardspree

Why Would You Not Want to Use Credit Cards?

To see if this is worth the first step is to ask  what are the benefits of going all cash? After all according to a recent study by Intuit, publisher of Mint.com, US household expenditure in 2013 was up to $4,220 per month. Now of course a large chunk of that relates to the cost of housing and auto payments, much of which is not easily paid by credit card, but if we are generous and assume 75% of that can be met with credit cards, that’s $37,980 per year of potential spend. If you could earn on average 1.5x your spend in some form of mile/point currency on that spend, that means your spending could earn you 56,870 miles per year. So that is what an “average” family would give up if they went all cash. With that lost what is the downside?

The commercial “bloggers” help spread the notion that this is free money, it’s points for spend you would have made anyway. Banks are just fighting for “wallet-share” – that is they just want to increase their foot-print in an existing market-place. But my tummy tells me that if banks like JP Morgan Chase, Citibank and Barclays are willing to pay huge acquisition fees in the form of affiliate kickbacks to “bloggers”, huge sign up bonuses and on-going earning opportunities, then there is more in it for them – a lot more – than just gaining a bit of wallet share. I think there is a sense in our community that the rewards we earn are subsidized for us by those who do not make timely payments, who carry balances on their cards and other factors which we all think we don’t do. I think there is a lot more to it than that and we are all being taken for a ride to a certain degree.

Credit Cards Make You Increase the Amount You Spend

I think the key driver behind pushing credit cards is it is very well known that using credit cards for “everyday” spend inevitably increases the amount you spend in total. There have been many studies on this and one of my favorites is this one by the American Psychological Association. This study actually is four studies under one report, and the first two focus on the concept of decoupling the process of acquiring something from paying for it. In simple terms when you pay for something in cash, you pay for it at the exact time you acquire it. But when you pay with a credit card, you acquire the “thing” right away but don’t feel the pain of paying for it for several weeks later. The studies confirm that this significantly increases the amount you are willing to spend.

Banks and credit card issuers have long used this argument to convince retailers and merchants to accept credit cards. When credit cards first started becoming popular many merchants refused to accept them. Why should they pay merchant fees of 3-4% of each transaction when they could just take 100% in cash? Well the argument is that if someone is paying with a credit card then they will spend so much more overall that it offset the transaction fees. Why sell someone a $50 meal for cash when you can get them to pay for a $100 meal with a credit card?

This is why you see credit cards with bonus multipliers on “everyday” spend. They want you to be putting all your gas, groceries and pharmacy store spend on credit cards so that it becomes part of your normal routine. They pay higher rewards on these and either take loss leaders or reduced fees in order to “train” you to use your credit card so that when it comes time to buy that new TV or dishwasher you also use that card. All of these rotating categories and extra points for your Happy Meal on the third blue moon of the year are just mumbo jumbo to keep you thinking about your credit card and how rewarding it is to be doing all this spending.

Credit Cards Increase The Amount You Are Willing To Pay

The third and fourth studies focus on the differences in willingness to spend when using a credit card versus cash. Again not surprisingly the studies find that people are willing to let go of more money if they are paying with a credit card or gift card. If you are in Best Buy looking at a new TV and the model you went in to buy is $699 but you see a snazzier model that catches your eye for $799. If you had walked in with $700 in cold cash you’d likely stick firm to your intentions. But with a credit card in your wallet and a “helpful” sales person you’re far more likely to just “go for it” on the more expensive model. At least you are earning more miles the commercial “bloggers” would write, smiling as they cash their affiliate income checks for helping this whole eco-system (I have actually seen specific “bloggers” make this exact comment numerous times).

A great example of this concept in live action is when New York City implemented credit card payments for all taxis. Initially this caused an uproar in the cabbie community, with drivers threatening to strike because they wanted cash not monopoly money. But as detailed in this New York Times article, the process led to a significant increase in tips and the number of people willing to use taxis. This actually highlights both of the points made so far – an increased willingness to spend, and when you do spend a tendency to spend more than you would if you were using cash.

The Cash and Manufactured Spend Alternative

Most writers and bloggers with views on this are either in the “all cash” or “all credit” camp. Democrat or Republican. Red or Blue, and no crossing party lines. I’d like to propose a third way, a middle ground that truly maximizes the value to you, the reader, rather than them, the banks and merchants. And that alternative is to go all-cash for your regular spending, and only use manufactured spending for meeting required spend on new credit cards and for earning points on existing credit cards. Here is my rationale for this view:

  1. You will spend less and save more. I don’t care how disciplined you think you are, if you are using credit cards for every day spend you will end up spending more often and in larger amounts. Countless studies have proven this as fact.
  2. The rewards you give up are not significant. My calculations above estimate that the average family might earn an additional 50-60k miles per year going all-credit. I earned twice that amount in one week doing manufactured spend.
  3. It will be easier to track your spending and budgets. My current spending mixes my normal and manufactured spend. It is messy to track. There are some great blogs out there detailing cash budgeting and using envelopes of cash for specific categories, so a “groceries” envelope, a “pharmacy” envelope. That way when I track my MS I know that every single dollar at these stores is just abnormal, manufactured point earning spend.

The only rationale reason I can think of for keeping some spend on credit cards is the additional benefits you may get for certain purchases. Renting a car with cash is almost impossible, and some credit cards provide excellent insurance coverage. I have written in the past about how I utilize the extended warranties offered by credit card purchases for certain electronics. It is hard if not impossible to shop online with cash, and online prices can often significantly beat bricks and mortar ones. Certain bill-payments such as your utilities, insurance and so on, which are largely fixed in price, are worth paying with a credit card as long as there are no fees (although even then you might think twice about cranking up the heat in the winter or the air-con in the summer if you were using old fashioned coin operated meters to control usage).

Conclusion

I think going to an all-cash or mostly-cash model for your every-day spend, and relying solely on manufactured spending techniques for earning lucrative rewards, is a very viable model that will truly ensure that you are actually benefiting from all these credit card offers rather than ultimately having them cost you more than they are actually worth. The rewards you can earn through manufactured spending dwarf your normal, every day spend. After all this #MileMadness madness is over I plan on running an experiment to use this model for a month and report my findings. Stay tuned!

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  • smay

    OMG! Such heresy will surely lead to swift and severe retribution from your (ex)community! Cash?? are you crazy! First you publicly expose (gasp!) MS and now champion the use of dirty greasy germ infested currency? You are a disgrace to the miles and points world and should have your blogger keyboard revoked! May your typing fingers suffer a pox of paper cuts! May your letter ‘e’ malfunction! May your first born be declined when they apply for the Sapphire card!

  • Elaine

    Interesting analysis and it is always fun to read new content but I do not agree with all points, among them:

    1) “I don’t care how disciplined you think you are, if you are using credit cards for every day spend you will end up spending more often and in larger amounts. Countless studies have proven this as fact.”
    While studies do show that most people spend more using cc’s than when using cash, not everyone does.

    2) That 50-60K may be easy for you to do in one week, but not everyone can do that.
    You need time; access to WM or VRs or whatever; creativity and financial savyy; discipline and recordkeeping skills; and enough of a bankroll to be able to do without the money in play for weeks or months if you are shutdown or have a catastrophic loss (like stolen/lost GCs). I do not think that most folks angling to earn enough points to take the family to grandma’s or Disneyland, or to fly Bus instead of Coach can/will/are comfortable doing that much MS.

    3) The 50-60K number is dependent on the accuracy of the $37,980 number you derived from the Mint study. I am not sure how accurately that reflects the annual spend of those in the travel hacking community. I am guessing it is low.

    Still, always fun to read a new take on an old question!

  • ABC

    For this experiment you need a good baseline. Do you have proper record of your current behaviour? You can’t compare it to Milemadness month.

  • Jack

    I know when I first started getting credit cards for the bonuses I did find myself spending more (got to meet minimum spend) in certain situations, being generous with others when dining out. I keep good records of my spend now and review at the end of the month asking myself if using the cards all the time is leading me to spend more than I would if I was using cash. I think I probably still do it from time to time. I agree that it can change a person’s perspective. I just hope Bluebird stays alive for a while longer and that I can keep using credit cards to purchase gift cards. I saw that tweet from Mrpickles earlier something about things changing. I’d be out of the game because I don’t have the everyday spend to meet big spend targets (recently got two of the 100k AAdvantage cards with 10K spend in three months for bonus) that I need to hit with all the cards I have been getting.

  • KennyB

    Great post and concept, even if going cold turkey may do more harm than good. I like to think I’m cheap enough that I wouldn’t spend less with cash, but it’s definitely true that the points from non-grocery spending add up to just about nothing for our family.

  • Jodi

    I have been considering this seriously myself. I currently put EVERYTHING I can on CC, but find it tedious and time consuming to track for budget purposes. I was thinking the same thing…how easy it would be to use the cash envelope system ( think Dave Ramsey) and simply do MS for points.

  • Jason

    Great write up! Look forward to hearing your real world results. I’m going to read the study you linked to as well.

  • Excellent and thought provoking post. Glad seeing some really good content lately in this corner of the blog world.

  • Andrew

    After reading the studies linked to above, one of the questions that I came up was whether or not these results would be the same in the context of a strictly imposed budget.

    If someone has tight control on their finances and imposes a budget on their monthly spending, broken down into different categories, how likely would they be to go over that budget simply because they are using a credit card? If they know they have $500 budgeted each month for “Restaurants and Eating Out” would they go over this imposed figure just because they are using a credit card to pay for their meals as opposed to cash?

    For those people who do not want to create (and stick to a budget) I certainly agree that paying with cash is a far better decision for the reasons listed above and in the studies. However, I am not sure that decision holds the same validity for people who are meticulous about tracking their spending (or simply have appropriate systems in place). Simply that they know each month what they have budgeted for fixed expenses and discretionary spending.

    Finally, I think anyone who is in this part of the game (manufactured spending) and doesn’t not have a real handle on their finances (the least of which a real monthly budget) should re-evaluate their priorities.

  • Seth

    Wanna know what I think is a bigger cash drain? Credit card annual fees! You get lured in with no annual fee and then a year later you have fallen in love with the points or have a hoard of points you don’t want to transfer so you keep a card that doesn’t earn you enough points to justify the annual fee. I mean look at all the people getting tons of the 100k AA deal lately which requires in effect a $200 annual fee from the start. Sure its a great deal from a points per dollar perspective, but if you’re getting 2 AA cards per person for a couple, you just spent $800 for those points. If you have no plans to use those points in the near future, you just spent a boatload of money by falling into the hype.

  • Cedric

    Excellent post. Those who think they cannot in any way fall prey to overspending to get the ‘reward’ are fooling themselves.

    Disclaimer: I am an all-credit cards user, with over 10 cards, and never spent a dollar on interest. That last bit does not mean I never overspent a dollar. Not the same thing!

    Data point: all-in normal spend about 3k a month, probably upwards of 50,000 miles a year, a lot more obv with MS.

    @MilesAbound: think you take that 50,000 miles a year down to roughly 20,000 for real “every day spend” that is not including larger ($100+) purchases. That’s where suckers are found, with $5 to $35 being the sweet spot (i.e. where cash is far superior than cards).

    I remember the 10+10 of the Chase Freedom, oh boy was I happy to spend my $2.43 by card! Only to realize my 6x multiple meant squat.

  • Kumar

    Hats off!!

  • J

    MA: thank you. I read this when you first posted it and have just come back to it via a very circuitous route, so I wanted to comment now. I am an early semi-retiree, so I love this perspective, in addition to trying to do everything I can to get as much as I can from the banksters, while ultimizing (is that a word?? 😉 don’t care ) my perfect credit. For me: I would put about 24k of normal spend on a cc per year, at the most (house paid off with cash). At 2% cb, that is $480. Pfft, one arrival appy, amongst many, many others. Also, I am extremely diligent in my spending/budgeting/savings/frugality, yet I DEFINITELY spend more with CCs (and prepaid/re-loadable debits). This method that you’ve outlined is how I now proceed (with the exception of a few *fixed* costs that are easier/better to put on a CC without a fee: eg car insurance, metro ride…). Works wonderfully. I save money and have traveled to so many amazing places and have had so many amazing experiences. I’ll put that extra cash to my first visit to Macchu Pichu next week, thankyouverymuch 🙂 ! Incidentally, I think doing this with separate accounts is fundamental, not just for record-keeping but benefiting us for the likely future tax audit(s). (Btw, I’m a big FT and good-blog follower, and definitely am big on getting CC bonuses/MS ). Off-topic: noting your posts about your ski trips, please feel free to get a hold of me when you (+your wife, etc) pass through Colo, you have (at least) a bottle of wine waiting for you. Oh, the summers are even better…says this expert skier. Cheers!

    • MilesAbound

      Thanks for this and the offer, much appreciated!! And glad you are dipping your toes in the commenting 🙂

  • J

    Sorry for the wall of words. I very rarely comment on a blog, so wanted to get it out. 🙂

  • Rob P

    I look forward to reading your updates on this topic! Very good points.

  • Pingback: The Contrarian View On Credit Card Spending | Miles For Family()

  • Jamie

    i am in Japan at the moment, and I Know, that spending cash is making me spend less. I think about the dwindling supply of hard currency in my wallet and whether I can be arsed going to an ATM again or if I’d rather just have a cheap bowl of noodles and save the money.
    If I’m somewhere that takes cards, there isn’t that possible atm trip in the back of my mind and I just get what I want. Not that I’m extravagant, but needing to use cash puts the breaks on a little bit.
    I wonder if it’s worth switching to using cash more when we get back home.