The percentage of people using credit cards as the sole method of payment has increased dramatically in recent years. More than 50% of credit card holders are now using their credit cards for everyday purchases. No doubt, the allure of the rewards programs offered by most credit cards today has a significant impact on this trend. What is yet unknown but predictable is the harm this will have on the financial health of many of these individuals.

Studies have shown that using credit cards will cause you to spend 12-18% more than when using cash, according to a Dunn & Bradstreet study. McDonald's reported an increase from $4.50 to $7.00 per order when a credit card was used vs when cash was used. Psychologically, this makes sense because a credit card, although intangible, does represent a form of money.

When you pay with cash, you experience the loss immediately. With a credit or debit card, the loss isn't felt until later, when the bill comes or when you see the transaction and the reduced balance on your account statement. Using plastic, especially a credit card, anesthetizes you to the feeling of loss, causing you to spend more because the loss isn't actually felt at the moment of purchase.

A participant in one of my workshops thought I was crazy when I shared that people spend less when they use cash versus credit or debit. This man admitted that he frequently purchased snacks from convenience stores and vending machines during his workweek. A week later, he came to me to confess that he had disagreed with my advice and had set out to prove me wrong.

He agreed to stop using his debit card. He took a small cash allowance for the week to spend on snacks and drinks. Every time he wanted to buy something using the cash, he found himself asking, "Do I really need to buy this right now, or should I save the money for something I'll want later?" By using cash, he was forced to consider every purchase in light of the limited amount he had, something he hadn't thought about when using his debit card. In the end, he confessed he hadn't spent most of the money, and the little bit he did spend wasn't even on himself.

Using cash will reduce your spending. Because you're physically limited to a specific amount to spend, it forces you to slow down and think about every purchase. At that moment, you're assessing the value of your purchase, whether it's equal to or greater than the cash you're willing to part with for it, and how that purchase will impact your limited resources.

Should you use cash for everything?

Although using cash for everything will help with overspending, it's just not practical. It's nearly impossible, and extremely inconvenient, to pay for everything in cash. You can't pay most monthly bills, mortgage payments, and make online purchases with cash. Therefore, it's best to use a debit or the bill pay feature from your bank to make those payments.

I recommend using cash in areas that are harder to control, such as food (groceries and restaurants), activities and recreation (entertainment and vacations), and personal expenses (clothing, hair care, and cosmetics). This will allow you to enjoy all of these still while keeping you from overspending.

Should you avoid credit cards altogether?

Some are adamantly opposed to using credit cards. I'm not one of those people. However, I respect them for taking a strong position on what they believe. What cannot be disputed is the fact that they will never be in a position to pay interest charges or have credit card debt hanging over their heads. I think that's very smart on their part.

As I mentioned earlier, using credit cards has been shown to influence your spending and potentially lead to increased spending. However, I believe that this isn't always true. I think you can use credit cards and avoid all the negative consequences of debt if you do so wisely. If you're managing your money with a clearly defined and written plan, tracking every expense, and sticking to your financial goals, then using a credit card is no different than using cash.

My wife and I have used a credit card for over 25 years without paying any interest charges. We committed 25 years ago that if ever we could not pay the full amount, we would cut up the card and never use one again. We've never failed to pay the amount in full each month. The sole reason for this accomplishment is that we have a budget, and our spending has been guided by that budget all these years. We spend what we have and no more.

Conclusion

Managing money is an important responsibility. Do it wisely, and you'll reap the rewards. Do it foolishly, and you'll pay a high price (pun intended); whether you use cash or credit isn't the real issue. The real problem is having a basic understanding of managing money and how to do it successfully.

If you develop a spending plan (budget) and manage your money according to that plan, spending less than you earn, and save and invest the difference over time, you'll build wealth and become financially secure.