Many years ago, I applied for a credit card that offered 2% cash back on all purchases. That was pretty generous, so you can tell how long ago that was!
Every month, we would use the card for all of our discretionary spending (that is, anything we bought on a week-by-week basis such a food, fuel and so on). We’d pay off the card every month in full. Then, once or twice a year, we’d get a decent cheque in the post with our cash back amount.
As we always paid off the balance in full, the credit card company actually made little money from us directly.
When I’ve used a credit card
I still have a credit card but I don’t use it for everyday purchases. Instead, I have used it for that one-off, occasional or unusual purchase such as our daughter’s prom dress.
However, because of the ease with which one can use a credit card in this way, there’s always a nagging thought in the back of my mind. Every time I do this (even for a relatively modest single item of expenditure), I‘m borrowing against next month’s income.
In effect, I’m creating a shopping hangover.
A change of heart
So, I’ve had a change of heart. The fact of the matter is this. If we’re going to win with money in the long term, this is what I’m going to do.
I’m going to perform plastic surgery on my credit card. Yes, I’m going to cut it into little pieces and throw it away.
Now, some of you still use your credit card in the way I used to. You tell me that you find it easier to track your spending this way (although, for me, I can’t understand this).
For me, it’s crunch time and here’s why.
What the research shows
Research shows that credit cards are ‘friction free.’ That is, handing over a card is less painful psychologically than handing over actual cash. In an article for Psychology Today, Scott Rick explains that people tend to spend more when they use a card than they do when handing over actual cash: “Experimental research….suggests that credit cards can stimulate overspending: People are often willing to pay more for the same product when using credit than when using cash.”
Indeed, Rick cites a range of psychological factors, which compel consumers to use a card over cash.
Even though I don’t put a lot on my card, I know that when I previously experimented by cutting up my card, I definitely spent less money overall.
“But what about business travel?” I hear you ask?
I once attended a work conference, which across the pond in Anaheim, California. I took my credit card for ’emergencies’ and actually ended up having to use it when I found my employer had failed to pre-pay my bill.
At my hotel’s reception desk, ready to check out, but fully expecting my account to have been settled, I learned that the transaction hadn’t gone through. Worse, the time difference between California and England meant that there was no-one in the office back at home to sort it out. I’ll admit that this was a time when I was glad I had my personal credit card.
However, this does not deter me from my plastic surgery. What I’d do in the future is request a corporate card, rather than rely on my own personal card, which required me to claim this expense on my return. No corporate card? No travel!
But a credit card’s for emergencies!
In my last post, I wrote about why I believe we all need an emergency fund.
In fact, a fully funded emergency fund should contain 3-6 months of expenses. So, if we have a fully funded emergency fund, we shouldn’t need to use the ‘shopping hangover’ method to cover unexpected bills.
The post-Christmas hangover
As the nation anticipates its post-Christmas credit card statements, I decided to do some research on card spending. What I learned really shocked me.
The UK’s spending habits
In October 2017, an article in The Independent warned that credit card lending was on the increase, in spite of warnings about the high levels of UK household debt. In the article, journalist Ben Chu cites regulators’ concerns about the extent to which households are turning to credit to finance their consumption.
Indeed, in the previous month, we saw headlines suggesting the UK was experiencing a ‘debt crisis’, as household debt had increased by 7% in the preceding 5 years.
Going slightly further back in time, the sheer volume of annual card sales is revealed in the UK Cards Association’s report of April 2017. I was staggered to read that, in the month of April 2017 alone, 315 million purchases were made on a credit card (up on the previous year’s figures by 41 million transactions). The overall total of money spent on a credit card that month was £16.8 billion (versus £15 billion the previous year).
What the hell were we all buying?
The report shows we’re using credit cards for a whole range of goods and services from food to fuel, with a marked increase in the use of cards (both debit and credit) over cash in these categories.
What if you have to use a card?
If you listen to Joshua Fields Millburn and Ryan Nicodemus’ podcast, you’ll have heard them say quite clearly: “If you have to use a card, you can’t afford it.”
In my case, if I decide to use a credit card, I’m swapping convenience for a shopping hangover. And I no longer want to do that.
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