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?
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:
- 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.
- 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.
- 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).
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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