Everyone knows that credit cards can be dangerous… they make it easier to spend beyond our means and rake up high interest debt. According to New York Times bestselling author Dave Ramsey, when people pay with plastic, they spend 12% to 18% more than they would with cash. Now let’s take that concept a step further… if people spend more with credit cards, will they spend even higher amounts if they are getting cash back or points on those purchases?
Well based on personal experience, I would say the answer is yes. My Chase Cash Plus Rewards credit card gives 5% cash back on groceries, gas, and at drugstores. Whenever I’m at CVS, I admit that factor alone sometimes persuades me to buy something I normally wouldn’t. For example today I was at CVS picking up paper towels when it occurred to me I also needed shampoo. Normally, I would never buy my shampoo at CVS (unless it’s on sale) because they charge about $1.50 more than Target does. However today, I was short on time and rationalized the purchase in my head “I’m in a hurry and I’m getting 5% cash back at CVS, so I might as well get it here.” I admit this is really foolish logic – I was paying about $1.50 more to get only $0.25 back. Doesn’t make common sense, now does it?
Of course I was in a hurry, so that was part of the persuasion. But even taking that into account, I know for a fact that the 5% cash back credit card was what ultimately led to my decision. If I only had cash on me, I probably would have done the logical thing and said to myself “I’ll just skip shampooing my hair tonight and I’ll pick some up tomorrow at Target when I have time.”
Now this was just one example involving a dollar or so. Imagine if someone used this logic every day, for every purchase. Because I know for a fact there are people out there like that… they will justify that overpriced snack at the gas station because of the extra cash back they get. They’ll overspend on groceries, because after all, they’re getting 5% cash back so why not spend $100 instead of $80? Sad, but true.
Of course in all fairness, I know there are plenty of people out there who don’t fall for this trap, but if you are someone that does (even if it’s just occasionally) here are three tips to stay out of trouble:
(1) Can you get the item cheaper somewhere else?
Just like my example above about the shampoo, if you find yourself in a similar situation, pause and ask yourself “How much cheaper will this item be if I buy it somewhere else?” Because the items at drugstores that aren’t on sale usually have outrageous markups.
(2) Would you buy that same item if you were paying with cash?
Another “litmus test” to apply to your prospective purchase is whether or not you would buy it if you were paying with cash. Ask yourself “Would I buy this if the only way I could pay would be the cash in my wallet or purse?” If it takes you more than three seconds to think about the answer, then that means you should most likely not buy it!
(3) Should you leave your cash back credit cards at home?
Or maybe yet, just do away with them altogether? The bottom line is if you think they will cause you to overspend, then you would probably be better off not having them in the first place. Even the best cash back credit cards still come with very high APRs, so using them to carry any kind of balance is just shooting yourself in the foot.
About the Author: Michael regularly writes about the pros and cons of cash back credit cards on his blog and message board, CreditCardForum. As a general rule of thumb, he advises consumers to avoid reward cards if they think they will lead to overspending.