Today’s post is from Mike, the founder of CreditCardForum.com, which is a website for credit card reviews and discussion. You can find him blogging daily on the site. I love this post because it presents an awesome counter-point to my typical position that credit cards are extremely beneficial and can be used responsibly, even for emergencies.
For years it was not possible to use a credit card at McDonald’s. This comes as no surprise, being that small purchases are the most expensive to process (15 to 30 cents up front, plus the 2-3% on the total price = a high percentage going towards fees when buying a burger and fries!).
But early last decade McD’s decided to try out credit cards and much to their surprise, they found that the average transaction size rose from $4.50 to $7.00!
Did the purchase size increase because customers were buying meals for their friends, too? That’s unlikely.
Rather, one can presume that with plastic in hand, a customer is more inclined to skip the dollar McDouble and instead splurge for the Angus Deluxe. And while they’re at it, why get a $1 cup of Joe when the premium iced mocha looks so delectable?
Who’s to blame?
Without a doubt, that type of mentality is probably what contributes to the average McD’s credit card transaction costing 55% more. McDonald’s isn’t dumb – they know this and that’s why they rolled out card acceptance ASAP as soon as they realized what was happening.
Most other fast food chains quickly followed. Then, even the banks tried to capitalize by offering higher rewards on fast food, like the Citi Forward credit card does.
But should we be blaming McDonald’s and the banks… or ourselves for this frivolous up-selling? To be honest, I’m sure all parties play a part. But ultimately, we can’t control the restaurants and the credit card companies. However, we can control ourselves.
All of us (myself included!) have probably been guilty at one time or another of spending a bit more on food than we need to, simply because we had a credit card in hand. This is why it’s so important for us to be conscious of this and mentally force ourselves to resist the temptation.
But that’s just food, how about everything else?
Well according to a study by Dunn & Bradstreet (the #1 credit reporting bureau for businesses), when people pay using credit cards, they spend 12-18% more. Wow, that’s a pretty significant increase!
So how much of that increase is due to frivolous overspending? And how much of it is due to the fact that the typical credit card user has above-average income, and therefore, buys more in general? Well, that we don’t know.
But as someone that writes credit card reviews for a living and runs a forum dedicated to them, I do know that without a doubt, at least a portion of the credit card users that average 12-18% higher are indeed overspending!
Do rewards perpetuate the problem further?
If plastic in and of itself causes some people to spend more, than what happens when we throw rewards into the equation?
Let’s face it–as Americans we love “free” stuff and the whole allure of points, miles and cash back credit cards seem like a good way to score something for nothing. But ask yourself this “Would I be spending the exact same amount if I were paying with cash?”
For some people, the answer is yes, and for them credit card usage is not a problem. However, for the people that think the best cash back credit cards giving 5% are an excuse to spend an extra 12% to 18% at the grocery store, they’re doing themselves a disservice and in fact – instead of saving money – they are actually wasting it! (they would be better off focusing on doubling up grocery coupons and doing an analysis of their grocery store receipts to learn how to save more!)
What can you do to protect yourself?
All of us have different strengths and weaknesses in life. If your weakness is buying things, then you should think long and hard about credit card usage. Are they causing you to spend more at McDonald’s? Is the 5% cash back at a department store causing you to buy clothes you don’t even need?
And even if your weakness isn’t so obvious, is there a possibility that you’re doing it subconsciously? These are questions all of us need to be asking ourselves, no matter how financially disciplined we think we may be.
The bottom line is that credit cards can be good financial tools, but only when they are used with the utmost self-control. If they cause you to spend more than you normally would (even if it’s just a little bit), you would probably be better off forgoing them completely and instead, sticking with debit cards or charge cards, where the balance is due in full each month.