Which is better: pay by cash, or pay by credit card? I mean, everyone knows the answer to this. If they made Who Wants to Be a Millionaire for the thinking impaired, this wouldn’t even qualify as the first question. So how come in 2009, credit cards accounted for half the bankruptcy cases in Singapore?
Telling a shopaholic “here’s a card, don’t overspend” is like hosting an AA meeting in a brewery. Once the credit card is in your pocket, everything changes. So let’s take a look at cash vs. credit again; but this time, we’ll include the psychological dimensions, and what you can do about them.
The Pros of using Credit Cards:
Emergency Bills – Technically, this isn’t really a “pro” to paying with credit cards. You’re better off paying emergency bills in cash too, if you can afford to. But some of us don’t have wads of money lying around for an unexpected root canal, or a pet that gets ring worms. In these cases, the ol’ plastic is a lifesaver.
Free Accountants – You know who’s more interested in your spending habits than you are? Your bank. They track every last cent you spend, because when you use a credit card, you’re spending their money. You can turn this to your advantage. Just treat it as a free accountancy service; it’s easier than the old “dog-eared pocket book” method.
I use my monthly statements as a warning. I invariably read the deductions through a veil of tears, and end in impassioned promises to cut spending.
Replacement Receipt – If you need a refund for something that’s defective, you’ll probably be asked to produce the receipt. If you’ve lost the receipt though, the statement from the credit card company is a legally recognized alternative.
Credit Cards are Safer to Carry – Well, kind of. Identity theft is a rising issue after all. Still, it’s best not to carry stacks of cash. If a mugger got me in an alleyway, all he’d get are credit cards, my IC, and an earache. Because I shriek like a schoolgirl when threatened.
By the way, don’t restrict your thinking to crime. If you misplace a credit card, you can block it with a phone call. If you misplace cash, you’d best hope it’s found by an earnest individual – who may at the very least consider giving it to charity (unless of course you’re in the habit of writing your name and number on every dollar bill).
Credit Cards are Faster – You don’t need to fidget and find change, so I’ll stop glaring at you from the back of the line.
Online Shopping – You can save a fair bit buying things online. And for those transactions to happen, you need a credit card.
The Cons of using Credit Cards:
Administration Fees – There are administration charges and annual fees for a credit card. Not using one means you save on those costs. Being charged a few cents for one transaction may not seem like much, but how many transactions do you make in a day? It all snowballs.
Interest Rate – Because of interest, everything you buy with a credit card may cost more.
Identity Theft – This is even worse than losing money at a bus stop. If someone nicks your credit card, you might suddenly discover you’re paying for a three year subscription to World of Warcraft. Debts as large as half a million have been racked up by identity thieves, in the span of a few hours.
You Will Spend More – The classic study on this is by Richard Feinberg, in the Journal of Consumer Research (1986). Yes, it’s an old study, but human psychology hasn’t changed for a while (As in, not since the days when the three C’s were Cave, Club and Clobbered Deer).
Feinberg’s experiment demonstrated that even seeing credit card logos made people spend more.
They ordered more food at restaurants, and left bigger tips. MIT economists Prelec and Simester did a later study, snidely titled Always Leave Home Without It.
They cite an unpublished study by Dilip Soman, who suggests that credit cards make you spend more because it’s hard to visualize your spending. Soman uses the example of speedometers: when drivers use a digital speedometer, they are more likely to speed because they can’t see the needle creeping up. Same with credit cards: there’s no moving needle above our wallet that dips toward “empty”.
So there you have it, the real picture of cash vs. credit. It’s not just statistics; we need to be aware of the psychological effects of paying with credit. Using credit cards means options like “top up” or “buy one more, I’ll give you a discount” become much, much more alluring.
To Sum Up
If you’re not certain of your self control, don’t buy on credit. If you are, choose a card that matches your type of spending best. You might want to check out MoneySmart.sg for a comprehensive list of popular Singapore credit cards to see if you can find the best one.
How do you control your credit card spending? Comment and let us know!
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Tags: Credit Cards