For the past 11 months I ran a self-experiment where I went from using only cash whenever possible, to always using credit cards (and paying them off in full). Here are the results.
Note from the Editor
I'm a long-time lurker on reddit, especially the Personal Finance sub. Not long ago I came across The Turtlemilk's post on cash vs. credit, and I thought our readers might be interested in the results. The author agreed to elaborate, so below you can read his original post as well as his expanded exposition written specifically for our site.
At Greatvest Tools, we're generally pretty supportive of credit cards and the benefits they can bring the user in terms of loan eligibility, rewards, points, and more. As outlined in this article, we believe that responsible use of credit cards can be increbibly beneficial.
That said, I thought u/The Turtlemilk's experiment was valuable in its own right, and sheds light on some often over-looked drawbacks of unmindful credit card reliance.
-David W., Founder, Greatvest Tools
Original reddit post:
I ran a self-experiment I went from using only cash to only credit.
For the past 11 months I ran a self-experiment where I first went from using only cash whenever possible (and debit online), to always using credit cards (and paying them off in full). Using YNAB, I tracked all my spending and planned out a budget every month before before that month began. The result:
Through credit cards, I earned $395.23 in 2%-5% cash back but also spent 19% more overall compared to cash (resulting in a loss). The biggest differences were:
Pain vs Pleasure. Wherever I used a credit card, because a part of me would think about cash back, it was fun. Even though I was buying something, it felt like I was getting free money. Yet because that feeling simply did not exist when using debit, purchases felt more like losses and uncomfortable.
Convenience. The credit cards were undoubtedly easier to use so I spent more on food delivery (mostly UberEATS) and at vending machines. Surprisingly, simply not wanting to get cash from an ATM was enough to prevent me from getting delivery, and not wanting loose change stopped me from using vending machines.
Restaurants. Similar to the first point, because I knew I was going to be using debit I was more mindful of the cost. Yet due to that almost subconscious part of me that would think about free money with credit cards, I was simply more likely to feel "this is fun" and order based on emotion.
While I am well aware that my self-experiment is not all scientific (there could be other reasons why I spent more on credit), I am surprised at the result because I've been budgeting and using credit cards for years. I have consistently had $150 budgeted every month for restaurants for example, and while with credit cards I would think, "I still have $X left to spend," with debit I just didn't want to.
It's incredible how subtle and yet powerful the lure to use credit cards can be. I suppose I could just have better self-control, but I have zero debt, live below my means, and did this experiment for almost a year, so I think I have a pretty good self-control anyway.
Food for thought.
Additional insight by the author:
With credit, prior to making a purchase, I spent time figuring out which of my cards would give me the best rewards (usually between two-five percent cash back). Then, armed with optimum card, I would feel like I was "winning", because I was able to match the best credit card to the purchase type. Getting "maximum free money" was fun for me.
MasterCard made me feel like I was winning $10, to hide the reality that I was losing $190.
People underestimate consumer strategies. Even within the highest echelons of the investment world, cognitive biases, groupthink, herd behavior, Fear of Missing Out (FOMO), risk blindness, and speculative bubbles are all well-recognized realities. Why would the marketing psychology based on airline miles, balance transfers, cash back rewards, credit scores, and sign-up bonuses be an exception?
Behavioral economies studies have consistently determined that people spend more when using credit cards. Yet mind boggingly, people believe that as long as they're "responsible" and pay off their credit cards in full every month, somehow that makes them exceptions to which the research does not apply.
The same individuals who see no downsides to using credit cards are buying lives in Candy Crush. They cannot get off Instagram and Twitter, farm Reddit karma, fall for confirmation bias, pay twice as much for a product's "Gold" edition, and obsess over "likes" on Facebook.
The effects of marketing psychology are everywhere. And that is the genius of the cash back system. It actually convinces people who spend $50 at their favorite restaurant that they're getting two dollars worth of "free" money.
For credit card consumer to earn $1000 cash back in rewards, in general they would first need to lose at least $20,000 or more likely $40,000. In other words, if someone were to purchase a $1,000 TV at 50 percent off they would save no money. Even if the $500 TV included a $100 rebate they would get no money. When taking the deal - whether that is to earn cash back or a TV - the consumer's net worth will only go down.
I recognize that we're moving towards a cashless world, and as such it will likely be impossible to ignore credit. But all in all, my experiment taught me to be more mindful of how I spend money.
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