It’s so convenient to buy things with a card; much easier than using cash. And when I say card, I don’t necessarily mean a credit card – a debit card is just as convenient. Who doesn’t like the ease of waving a card over a credit card reader, entering a PIN (or not if it’s a PayWave transaction) and you’re on your way? And it’s so much easier than carrying around cash.

But it’s not the smartest money decision and is probably costing you in the long term.

But first, some history.

Back in the olden days (the 1970’s) when I was a kid, you used cash for your transactions. Or a cheque if you had a cheque account. My mum used to head to the bank every week, withdraw my dad’s wage and then come home and allocate the money towards the various bills and spending needs our family had. It was simple and, apart from having a home loan and a car loan, there wasn’t much personal debt.

Then credit cards came along. Here in Australia the Bankcard was the first one available and others soon followed. My parents had one, and mum made sure it was repaid every month. She used it for transactions that were larger in value so she didn’t have to carry so much cash around.

Then store cards became more popular, and a lot of department stores changed their store card to a badged Mastercard or Visa card so you could use it across other stores, not just their own.

And throughout all of this, people were living beyond their means. They were racking up thousands of dollars of debt on credit cards, and couldn’t pay it off.

This hit home for me in my first job – Teller I at Westpac Bank in Elizabeth. A customer comes up to my counter and the exchange goes something like this:

Customer (handing over credit card statement) – “I’d like to pay my credit card.”

Me (starts filling in the form and entering the full balance as the amount being paid) – ” Okay, that’ll be $4,411.”

Client (looking aghast) – “No, I only want to pay the minimum amount.”

Me – “What?”

This was the first person I’d met who didn’t repay their card in full every month. To be fair, the only other person I knew who had a credit card was my mum and she paid it off every month so I didn’t have a very big sample size. But I was shocked. And over the next few weeks, I discovered this was a common occurrence. More people paid the minimum amount than actually paid in full. And they were being charged interest at over 20%.

And some were taking a cash advance from one card to use to pay the minimum balance on another card. Think about that for a minute – they were so deep in debt that they needed to go further into debt just to make their minimum monthly repayments. Crazy.

One degree of separation

Here’s the problem – we spend more money when we use a card to pay for the purchase than when we pay cash. There have been numerous studies that prove this time and time again.

The reason? When we hold the physical cash in our hands and have to make a decision to break a $20 note to buy a drink we’re making a conscious decision to spend that money. And when we notice that all that’s actually in our wallet is a $20 note and that needs to last until the weekend, we put the money away, close our wallet and find a tap somewhere.

It’s old-fashioned to hold cash, but it makes us think differently.

The Pain Of Spending Money

The reason credit cards are popular is that they reduce the pain of spending money. What do I mean by this? It’s simple.

When you spend money, it’s painful. When you hand over a physical $50 note to pay for something there’s a feeling of pain because you’d probably prefer to not spend that $50. You’re feeling the pain at the point of purchase and it’s associated clearly with the purchase you’re making.

The alternative is to pay by credit card. This way you defer the pain until later. And that makes the purchase feel so much better because now you just feel the happiness from buying something. There’s no feeling of pain because in your mind this purchase has gone on your card and you don’t have to face it until some time in the future when your credit card needs to be paid.

So if you defer the pain, you spend more. Because when you use a credit card and defer the financial pain, there’s no inner voice telling you to spend less.

And when the credit card statement arrives each month, you don’t want to open it because of the pain of owning up to your spending. Many people don’t look at their statements until the last money – that’s one way to defer the pain.

I remember during the GFC having clients who were too scared to open their investment statements because they didn’t want to experience the pain of losing money. So they didn’t open the envelopes.

Pain is a normal part of any financial transaction. It’s the pain of having to spend money knowing you only have a limited amount to spend. It’s the mental pain of having to weigh up whether to spend the money on this or that, to spend today or defer the spending for the future. And in this case, pain is good. It’s a bit like stress – a small amount is a good thing.

When you experience financial pain you begin to spend consciously – you think about what you’re spending your money on and you make better choices. When you hide the pain by using a credit card, there’s no push-back so you keep spending.

And a further complication of using a credit card is that it’s hard to keep track of your spending. We struggle to run the balance in our heads and we lose track of our spending. It’s totally different to having a limited amount of money in your purse (or wallet).

But don’t expect the credit card companies to help any time soon – they want you to have more credit, not less.

It’s up to you. Try spending cash only for your day to day purchases as a start and become aware of how different your brain reacts when you start spending cash rather than using a credit card. See if you don’t start becoming more cautious in your spending because you’re more aware of the amount you have to spend and you’re feeling the pain each time you spend money.

What are your thoughts? Do you experience financial pain when you spend money. Do you defer the pain until later? Do you hate opening your credit card statement? Do you use cash for everything?

Leave a comment below and let me know your thoughts.