Piggy bank

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Except for those times when a credit or debit card is a necessity, seriously consider leaving it behind. In studies, using cash is consistently associated with lower spending, and more deliberate (and healthier) purchasing choices. Use these strategies to keep your bank balances up and your credit card balances down.

1  Carry cash, not cards

We’re more likely to buy something if we’re paying with plastic than if we’re paying with cash, says a 2012 study in the Journal of Consumer Research. That’s because handing over cash gives us a painful emotional jolt, while paying with plastic is just too comfortable, according to the Journal of Experimental Psychology (2008).

For those occasions when you do use plastic, set up transaction notifications (e.g., texts) on your banking or budgeting app. This may help you maintain a more realistic sense of your spending. If you use a credit card, never spend more than you can pay off in full that month.

How paying with credit affects our food choices

Paying with credit cards is associated with less healthy food choices. A 2011 study of shopping behavior found that shoppers using credit or debit cards picked up more food items that were considered unhealthy; cash buyers were more likely to avoid junk foods.

When we encounter cookies, cakes, and pies—and when we’re paying with plastic—“the emotive imagery and associated desire trigger impulsive purchase decisions,” researchers wrote (Journal of Consumer Research, 2011).

Speaking of grocery shopping, watch out for free samples and how they affect your buying decisions. Even those nano-servings of prepped food in grocery stores invoke our sense of reciprocity, according to a 2011 study in the British Food Journal. This can make us more likely to buy products we don’t need.

2  Ditch the gift cards—request money gifts in cash

As we’ve seen, cash gives us the gift of uncomfortable self-awareness about our expenditure. We don’t like parting with real money. In contrast, we see gift certificates (and credit cards) as “play money,” and we’re more inclined to get reckless with them, wrote researchers in the Journal of Experimental Psychology (2008).

3  Review your automatic payments

Paying bills automatically can help protect us from overdue charges and bad credit. The downside: Automatic payments are another example of passive transactions, and these have risks. When we pay bills automatically, we’re not watching our spending or looking around for better options. Review those bills routinely, and sign up for payment alerts.

4  Pay off your credit card in full every month

Credit cards involve passive, behind-the-scenes transactions. They make spending too comfortable and going into debt too easy. Consumers using plastic are focused on the benefits of the product instead of thinking about the cost, according to a 2011 study in the Journal of Consumer Research.

Passive transactions can work if you use them to avoid debt and save money. For example, when you automatically pay off your credit card every month using online banking “Bill Pay,” you’re building your credit score while avoiding racking up interest charges. If you overspend and can’t pay the credit card bill in full, pay as much as you can—more than the minimum required payment.

Every credit card use = a high-interest loan

Every time you use your credit card, even on smaller items, you’re taking out a high-interest loan. Small credit card loans add up quickly. They incur high financial penalties for late repayment and contribute to serious debt. A video game, night out, or pair of sneakers is so not worth this.

Credit card companies may “require” a relatively low repayment each month. We may feel we’re in good standing if we pay off that $25, but if we spent $50 that month using our credit card, we start racking up interest charges on top of the amount we already owe. If you can’t pay the full bill, always try to pay more than the minimum. As a rule, avoid spending more than you can repay that month.

“A major problem is that some consumers underestimate the total costs of piecemeal borrowing. Apparently people who would never take out a big loan are willing to take out a number of small loans that are big in the aggregate,” writes Dr. Cass Sunstein, a leading behavioral researcher (in New Republic). “One survey found that small purchases of nonessential goods (including movies and DVDs) are a major contributor to credit card debt. Financial distress, including consumer bankruptcies, is a possible consequence.”

Calculate your credit card interest and repayment timeline

5  Watch your bank fees

Millennials are the age group most likely to overdraw their bank accounts, according to the Consumer Financial Protection Bureau (2014). Often, overdrafts are the result of small transactions. Going overdrawn effectively makes these transactions far more expensive because they incur bank fees.

ATM charges are added fees. If you’re paying $2.95 to withdraw cash from an ATM that isn’t “partnered” with your bank, two withdrawals a week are costing you more than $300 a year. It’s time to find out where you can make free withdrawals. Some stores provide cash-back services without a fee.

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Article sources

Bakker, T., Kelly, N., Leary, J., & Nagypal, E. (2014, July). Data point: Checking account overdraft. Consumer Financial Protection Bureau. Retrieved from http://files.consumerfinance.gov/f/201407_cfpb_report_data-point_overdrafts.pdf

Chatterjee, P., & Rose, R. L. (2011). Do payment mechanisms change the way consumers perceive products? Journal of Consumer Research, 38.

Dratch, D. (2014, January 7). How behavioral economics explains six common money mistakes. CreditCards.com. Retrieved from http://www.creditcards.com/credit-card-news/behavioral-economics-6-money-mistakes-1267.php

Heilman, C.,  Lakishyk, K., & Radas, S. (2011). An empirical investigation of in-store sampling promotions. British Food Journal, 113(10), 1252–1266.

Raghubir, P., & Srivastava, J. (2008). Monopoly money: The effect of payment coupling and form on spending behavior. Journal of Experimental Psychology: Applied, 14(3), 213–225.

Renzulli, K. A. (2014, August 27). The spending mistake that millennials are making. Time.com. Retrieved from http://time.com/money/3182089/millennials-spending-mistakes/

Sunstein, C. R. (2012, October 5). Show me the money. New Republic. Retrieved from https://newrepublic.com/article/108153/show-me-the-money

Thomas, M., Desai, K. K., & Seenivasan, S. (2011). How credit card payments increase unhealthy food purchases: Visceral regulation of vices. Journal of Consumer Research, 38. Retrieved from http://forum.johnson.cornell.edu/faculty/mthomas/VisceralRegulationofVices.pdf

Lucy Berrington is a health writer, editor, and communications manager. Her work has been published in numerous publications in the US and UK. She has an MS in health communication from Tufts University School of Medicine, Massachusetts, and a BA from the University of Oxford, UK.