I have been thinking a lot about the different mechanisms that fuel our consumer culture. Our current modus operandi is unsustainable.
So lets talk about our burgeoning credit card debt and the psychological effect when paying cash vs card.
It’s not something people normally want to deal with so it is time to bring it out in the open.
Credit Card Debt
How did it get our consumer culture become so prevalent?
Why is credit card debt now approaching A$50 billion in Australia?
Before we answer those two questions, lets break down that debt figure into smaller numbers to make it easier to digest.
Based on a population of 23 million that is A$2,173 for every man, woman, and child; I dare say that quite a few of those don’t have credit cards to begin with.
Case in point, before Kim and I started our green journey we are ashamed to admit that we were around A$22,000 in debt on credit cards. If we paid the minimum payment of $200 a month, it would have taken us 9.2 years to clear it. And that is without adding any more to the balance.
We paid it off month by month, add more than the minimum payment, and then throwing more on it as the savings from our new lifestyle began to manifest.
It took us a couple of years, but we did it. We paid it off. We got rid of all high interest cards, consolidated into one and lowered the cards limit down to $6000 (in case of emergencies).
So we were prone to live beyond our means, and the Reserve Bank of Australia stats indicate that Australians are in debt, what makes people spend so much on cards?
Cash vs Card
Well, some recent research has found whilst there is a pain mechanism associated with handing over cash for a purchase, there is no similar psychological trigger or reaction when paying by credit card.
Studies conducted by George Loewenstein and his colleagues and published in 1998 and 2001 looking at whether people experienced pleasure or pain when shopping.
“One of the many interesting findings was that paying in cash elicited greater psychological pain than other modes of payment, including the use of cards or delayed payment methods.
The suggested reason for this was the ‘de-coupling’ of the actual purchase and the pain of paying for it. In other words, handing over cash to a shop assistant couples a loss of available money with a purchase.
By paying with a credit card, consumers created a buffer zone between the purchase of the product and the loss of their money (both psychologically and temporally). ” – source.
Have a listen to this snippet of audio that recently aired on the Radio National show Talking Shop. It is a conversation between Kirsten Drysdale from ABC TV’s The Checkout and Dr Paul Harrison.
Certainly food for thought.
I have also noticed this effect since we started taking credit cards as payment for products during our workshops. People who have cash only buy the essentials, but those that pay by credit go all out! Not that I am complaining about sales at our sustainable living workshops, it is just an observation to back up the research.
Let me put it to you straight. If you pay cash, you are prone to spend less on novelty items or what I call wants. Inversely, if you go shopping on credit, then you will be likely to spend more on stuff you just don’t need.
My advice to you all is if you are one to decouple the purchase from the pain, then do the opposite to what the credit card commercials advice; “please leave home without it!” Cash is king for a reason, and will help to keep your spending under control. I shudder when I have to hand over a fist full of $100 notes!
If you are after some more tips on how Kim and I budget, have a listen to TGoG podcast episode 64, which we recorded a couple of months back. It is titled “How We Budget and Tips to Save Money“. It is one of the most popular episodes that we have published.
So who is ready to get their cash flow under control? Or who has already taken big steps to reducing their debt, which has helped them live a more comfortable lifestyle?
Confession time peeps!
I wholeheartedly agree that CASH IS KING and that when you use cash you know and realize it’s money. When you use your card (whether it be credit or debit card to your own money) you are de-sensitized to the money you are spending. If you have $200 in your wallet at the start of the week and you have $15 at the end of it your eyes can see the money is GONE and there’s no more left to spend. If you say allow yourself the same $200 on your debit card you aren’t really going to add up your receipts in your wallet as the week goes by to keep it to the $200. I used cash for 3.5 years for everything (except bills paid on line) and I can tell you my budget was at it’s best. I now use debit card but want to go back to cash because it’s so obvious. You know you are spending actual money!!
How’s this for crazy…..I was wanting to get a credit card (separate to joint ones) in my name because the marriage was on the rocks and I needed one. At the time we had quite a lot of shares all in my name and $25,000 of them was with the NAB where we banked. Because I was a stay at home mother when I rang the bank to get the credit card they said no. In fact the shares I held in my name were 4 times that of what was held in the NAB shares. They said I wasn’t working so couldn’t get a credit card. My brother in law who previously worked in a banking institution told me to go online and apply for one that way and within 15 minutes I had a credit card on my way with a limit of $3,000. I was very cross because I had assets and they didn’t care. Isn’t this the type of customer a bank wants. Anyway I have the same credit card today and thankfully they don’t send me letters to up my limit but every time I go online to check my balance there is a little line in red that says click here to up your limit (now that is entrapment I think). I don’t do it but there are plenty of people that do.
My sisters friend told her that the banks gave her daughter a credit card and she had no job (don’t know what bank but completely unsuitable).
No bank to cash is king……….I felt most in control of my money and budget when I paid cash. I would get the money out for food and petrol and a little for entertainment and put it in my wallet (I got a wallet that had little dividers in it with tabs for headings) and I knew how much was in there for each thing. It was wonderful. Paying with cash does make you think twice about whether you want the purchase or not.
Gavin Webber says
Thanks for sharing Kathy. Great comment. x
Visa is widely accepted … and lets face it, most businesses use it, online, instore … why not use a visa debit card linked to your everyday account? I use mine for absolutely everything without fear of over spending because it only uses the money you have in that account. Most banks also make a visa debit card that is fee free! So as long as you press the credit option using eftpos there are no bank fee’s. I rarely carry cash as I find my visa debit to be a safer option for me 🙂
Gavin Webber says
Great tip Sis! We too use a Visa debit card, but only ensure that we place money into the account when we absolutely have to use it for on-line shopping. All other times it has no balance. That way we feel less inclined to lash out so to speak when out and about. x
Marijke Van der Vlist says
I do use my credit card, because it’s so convenient and I can keep my savings earning interest, while I use the banks money. I even get $10 dollars as a reward for using it.
But I pay it off every month. And keep track of my income and spendings in between.
While reading your article I thought about this article I read a week ago:
Pretty disgusting marketing if you ask me!
My kids are only young (eldest is 6), but I’m already teaching them about money. About what things costs, what we’re saving for, setting budgets for necessities and building buffers for emergencies. The only loan we have is for the house and we’re steadily chipping away on that. I refuse to get a loan for a car or furniture, only buy what we can afford. Hopefully it will rub of on my kids.
Gavin Webber says
Hi Marijke. Well done on your self control. It takes a lot of planning and willpower to keep an eye on the beast and pay it off in full monthly!
A similar thing happened to my daughter Amy when she was 17. American Express sent her a letter saying she was eligible for a card. She was only on minimum wage at the time. Predator marketing if you ask me. Like a clever lass she is, she didn’t take up the offer.
I won’t say how much credit card debt I had but it took 2.5 very frugal years to pay it off. I haven’t used one since and never will again. Since I also paid off the house then, I can proudly say I am debt free. Definitely worth it.
Gavin Webber says
Kudos to you tpals! It must have been tough, but well worthwhile.
Being an ‘oldie’, I grew up in an era when there were no plastic cards, only cash and bank books. I got a debit card a few years ago so I could buy stuff on the internet that wasn’t readily available in the shops. I don’t keep much in it and only transfer money into it when I want to buy something. I don’t need credit from a bank…I have enough of my own money to cover my needs and (most of) my wants. As a child I was taught to save up my allowance for anything I wanted and that has stuck with me. When I see (seemingly intelligent) people racking up credit card debt, the mind boggles.
Gavin Webber says
Same here Bev. I was taught to scrimp and save for what I needed, which I used wisely during my navy days. I forgot it so quickly once I left. It only took me 6 years to clock up a mountain of debt.
I have a debit visa only now. I had a $1000 limit on my card and I had it sitting at maxxed the entire time. Paying it off and cutting it up, plus calling the bank to actually cancel it was the best thing out. The bank tried very hard to talk me out of it though. I still receive junk in the mail asking me to get a card and I don’t even HAVE a job! Based on the fact my husband does though they would give it to me I am sure. 🙁
I find though, even with a debit visa that draws from money in my account, there is still a distancing from the purchase. Smaller perhaps but it is there. Cash is truly best.
Gavin Webber says
Good point Jess about the ongoing marketing. Kim just tears that junk up when we receive mail from credit card companies. We receive about two a month through our letter box. x
I used mine wisely… I used it to light the fire! 😉
We are also a couple of oldie’s, so there was no credit cards around when we stared out. We did take on debt for furniture etc. but it was through my husband’s credit union. We have cards now but the visa is mostly for online purchases and here in Canada we have debit cards attached to bank accounts so it’s sort of like money. We use that for day to day purchases…groceries,gas etc. I take a weekly allowance and save up to buy what I want, mostly yarn or fabric 🙂
We have never paid visa one red cent in interest.We paid our house off early and my husband retired at 52 and I at 55. We live well on our pensions and have no wants.
Gavin Webber says
Well done Marie. Leading by example!
When our marriage split I was left with a huge credit card to pay because as I worked for a Bank at the time it was applied for it was in my name ( a lesson for all women out there) not to have ANYONE use your credit card. Since paying that off and buying my tiny house I manage all my bills by cash. I am in control and I can sleep at night. I pay all my bills in advance at the post office and I never get a shock when the bill arrives. I allocate all my expenses by working out yearly bill, add 10% then divide by 26 fortnights and that is how much I have to allocate per bill. I can only spend what I have allocated, nothing more. My dear old dad who passed away a long time ago said you only buy what you can pay cash for. No cash no buy. Simple. My son who has learning disabilities knows when he gets a job he will only have a DEBIT card and never a credit card. He watches me budget and he learns. He never asks for anything as he knows he has to save his $10-00 per week pocket money if he wants anything. He is almost 14 yo.
These are good lessons for our kids that they have to SAVE for what they want not buy on impulse.
By the way, thanks Gavin you would be so proud of me. Since attending your class at Wantirna with Kath from Cheapskates I have 4 vege gardens made from crates. I am growing Kale, carrots, peas, beetroot, silver beet, parsley (2 types) ,oregano, rosemary, basil, curry plant, chives, an apple tree from diggers (and in my front yard I am proud to say) and heaps more. All the plants in my garden were donated by really kind freecycle people who let me take cuttings to kick start my garden. So apart from buying seeds and one apple tree, my garden is full of pre-loved species. I did buy a Bokashi for my vege scraps and my soil is so healthy and full of worms. As I save I intend to buy some more small fruit trees for my small garden. My garden gives me so much joy and my dear 90 year old neighbour and I learn from each other and share and interest.
“It’s hard for bad things to happen when you have no debt.” (Howard Lutnick, CEO of Wall Street firm Cantor Fitzgerald)
Gavin Webber says
John Shadows says
We never had credit cards.
We don’t want them.
In 2002 Europe installed the EURO as a new method of paying in almost every european country.
In my country, Belgium, 1 € is 40 X worth the old 1 Belgian Francs.
But… people don’t realize this.
They spent € like it was Belgian Francs.
For example, a washing machine Miele price 1.500 €
“It’s not that much, is it?”
It’s 60.000 old Belgian Francs.
What are you thinking.
The number of people with debt in my country is escalating.
Gavin Webber says
Sounds like a crazy situation over there in Belgium John. Thanks for sharing.