This isn’t a unique claim. We all know that it’s hard to pay off debt at the same time we’re buying on credit cards. But for many of us, it’s hard to do. We tell ourselves that it’s OK to charge-we’ll just pay more when the bill comes. And the rewards! The rewards are valuable and we would be foolish to pass up rewards on things we’re going to buy anyway.

Although these arguments can seem compelling, it’s wise to just stay clear. Here are a few different points for you to think about that may sway you to lay off the plastic:

First, people buying on credit spend more per purchase and the items they buy:

• A Dunn & Bradstreet study found that people spend 12-18% more when using credit cards than when using cash.
• McDonald’s found that the average transaction rose from $4.50 to $7.00 when customers used plastic instead of cash.
• Professors at the Sloan School of Management at MIT found that study subjects were willing to pay up to 100% more for identical purchases when they pay with plastic rather than cash.
• USA Technologies (2008) found that customers purchased items costing 33% more when they purchased with credit vs. cash.

Why does this happen? Simply put, plastic lowers the mental cost of making a purchase.

• Paying for the product or service is put off when you use plastic. Therefore we don’t do the same mental accounting as we do when we pay with cash.
• When we buy several things on a credit card at one time and pay in a single transaction, there is no clear signal that we may have overspent on any one of the items
• Paying with cash is a visual clue that money is being spent. And while checks don’t have the same effect, writing down the amount physically still imprints on your brain that you are letting go of some cash.

If you decide to take the plunge and swear off credit, we offer the following tip:  set up two checking accounts, one for day-to-day spending and another for debt payments.  If your employer offers direct deposit, deposit enough into your debt payment account to meet your debt payment goals.  This will ensure that you can always make your debt payments and that you keep to your debt payment plan.  Deposit the rest of your paycheck into your day-to-day account and use this to manage your spending.  With many banks you can set up daily balance alerts to let you know how you need to manage your spending.  With many banks, you can also get spending reports that categorize your spending for you and help you understand how you can manage your spending better.

With a bit of organization, you can make it much easier to manage your day-to-day finances and ensure that you make as much progress as you can paying off your debt.

Good luck and let us know if this tip helps you.