A simple rule that can change bad credit card behavior

There is some evidence that using cash instead of credit can help consumers cut spending, but it can be difficult to put this little financial wisdom into practice. After all, credit cards are more convenient than cash, and their use offers some benefits and protections that cash cannot.

But a new study from the Urban Institute and the D2D Fund offers a common ground that consumers might find more realistic: Use cash for anything under $ 20.

Study organizers regularly reminded thousands of credit union customers to use cash for purchases under $ 20. Those who received the reminders had $ 104 less in revolving debt, on average, at the end of the study, which is a 2% drop from their benchmark average.

Here are some of the reasons why you should try this simple trick if your savings could use a boost.

Why it’s so much easier to swipe a credit card

Research supports the theory that we are more willing to pay on credit. It’s a phenomenon that psychologists call the “credit card premium,” and according to Psychology Today, it’s driven by a number of factors:

It’s just easier to swipe a credit card than it is to pay cash because you don’t part with anything tangible. A recent study even found that when “tightwads” were forced to pay for certain foods with credit cards, their spending slackened so much that they approached the credit card spending of “spenders,” who are more. likely to spend too much money to start.

High credit limits can make a small purchase feel like a drop in the bucket. After all, it’s easier to think of a $ 10 lunch as a trivial expense when it’s charged to a credit card with a $ 3,000 limit instead of using half of a $ 20 bill.

High credit card limits can also cause card users, especially those with little credit experience, to overspend believing that they will one day have the income to justify these high limits.

Why focus only on small purchases?

In light of the research above, paying cash only for all purchases may seem like the smartest idea in the fight against overspending. But taking a “step-by-step” approach and focusing on small amounts may be a smarter idea for several reasons:

Impulse purchases are often small. A CreditCards.com poll found that 20% of those polled said the highest amount they spent on an impulse purchase in the past three months was only $ 25.

We are more likely to ignore incidentals than large purchases. The $ 4 latte for the morning commute, the $ 10 salad for lunch, $ 2.99 for a new app – they add up quickly, but a lot of us don’t really budget for them. The use of cash forces a greater awareness of small expenses.

It is risky to carry bundles of banknotes. If $ 1,000 in cash is lost or stolen, it’s almost over. But if a thief steals your credit card and charges $ 1,000 for purchases, your liability reaches $ 50 thanks to federal regulations.

Credit cards offer benefits that cash does not. If a large credit card purchase doesn’t live up to their bill, the buyer can dispute it, and you can also enjoy benefits like extended warranties and price protection. There are also cards that offer rewards like cash back – a good bonus as long as users don’t spend just because of them.

Responsible use of credit cards creates good credit. Sooner or later, most people need to get a loan for a house or a car, rent an apartment, or do a number of other things that require a credit check. But it’s hard to build good credit when you’re not using it.

It is just not possible to use cash all the time. Cash is not very useful when you want to shop online, rent a car, or book a hotel room. Some physical stores won’t even accept it anymore and don’t have to.

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So while “cash only” sounds good in theory, “cash only for the little things” could be much more useful in practice. It offers the best of both worlds: more budget control, plus the benefits and protections that plastic can offer. So step away from the scissors and put the credit card back in your wallet. Make sure to dust off this ATM card as well.

CNNMoney (New York) First published on November 3, 2016: 11:43 a.m.ET

About Andrew Miller

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