The Federal Reserve recently released a report about about consumer payments [pdf], and it had some interesting results (at least to me). Via Business Insider. Here are the distilled highlights.
Cash is still the most frequently used form of payment, as measured by number of transactions. This is partly due to the fact that cash totally dominates for payments less than $10. In terms of value, electronic payments (online billpay and ACH payments using bank account numbers) have the largest share.
This next chart shows that debit card use is actually growing faster than any other form of payment:
Overall, debit cards are also the most preferred form of payment… but it does vary with income. 55% of consumers with household incomes less than $25,000 per year prefer cash over anything else, while 66% of households making more than $200,000 per year prefer credit cards over anything else.
People seem to have an either/or relationship with debit cards and credit cards. You either use one or the other predominantly.
Initially, I was surprised by the popularity of debit cards. (I prefer credit cards and am one of those people who haven’t used a debit card in years.) My hunch is that people think of debit cards as the closest thing to electronic cash. The money gets zapped out of your checking account and your balance decreases instantly. As long as you decline overdraft “protection”, if you hit zero your purchase will be declined. I admit it does have the appeal of simplicity.
Although I treat my credit card purchases the same as cash and always pay in full each month, credit cards do come with more complexity and the knowledge that the credit card company is lying in wait in case you feel like taking on a little debt. But in return I earn cash back rewards, get better consumer protection against fraud, and enough sign-up bonuses to fly me around the world once in a while.
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That’s cause you’re rich.
As a financial blogger, it is not a great leap to consider that Jonathan may have good control over his finances and only puts on his credit cards what he is able to repay each month. Paying the full credit card balance from the checking account linked to your debit card is not that different than paying with a debit card. Except for, as the post states, the credit card rewards.
You could make the argument that higher income households probably spend more as well, which means that a cashback rate of 1% on that higher spending is a bigger number and thus worth the “hassle” of credit cards. But it’s still a fixed percentage of spending for the most part, and I would argue that gaining say $1,000 of credit card sign-up bonuses a year is more significant for someone earning $30k a year than someone earning $100k a year.
Being poor means you have to pay every transaction immediately instead of waiting a month to pay the total amount? Someone needs to go back to logic school.
With the credit card, the situation is the exact opposite of what you describe. You pay the bill immediately on credit card, but you don’t have to spend you personal money until a weak later. According to your logic this extra month grace period is even more valuable to low income individuals.
Not sure if you missed my sarcasm or not because I’m not really sure what “you pay the bill immediately on credit card, but you don’t have to spend you personal money until a weak later” means, or at least what point it’s attempting to make.
With a credit card, you buy something, but don’t have to pay for it until sometime next month. The money you’ll eventually pay for the item gets to remain in your bank account or under your mattress until then. With cash (or debit), you buy something and the money is out of your hands immediately.
If you pay off the bill each month, using a credit card is beneficial, regardless of whether you’re rich or poor.
Not to mention the security benefits.
Yes, it takes some brainpower to be able to manage your finances so you can always pay the bill in full each month, but other than that, there’s no benefit to using cash or debit over credit.
I don’t notice it. But it is more work. I use the system where I fund my bills a month before they are due. I’d I pay this month’s bills with last month’s income. And since I pay primarily with credit cards, I don’t give up my money until the following month when the credit card is automatically paid in full.
It’s really like I set the money aside for bills 2 months in advance, from that perspective .
To the previous comment. Being rich has nothing to do with it. You have to be smart. Spend only what you have and pay your credit card bill in full. People just can’t get it! And if you are really that weak and can’t budget and plan your life, you can pretend like you are using cash. When you go to the cash register, instead of handing over your cash, hand over your credit card. Then take that cash and put it away in a zipped pocket of your wallet. Then at the end of the month, use that cash to pay you credit card bill. At least you you will be getting cash back for using your credit card. For instance, if you spend $1000 a month, you will be getting $30. Would not that be beneficial to you?
But…but…self-control and personal responsibility is SO HARD!
Another benefit of using credit cards versus debit: identity theft. Jonathan may find it useful to dive into the liability limitations and reimbursement timelines which credit card companies face versus banks/checking accounts.
I personally just know that I would rather deal with getting a charge taken off of my credit card instead of getting the bank/merchant to put money back into my checking account.
I am amazed at this study and the overall stupidity / ignorance of the cash / debit paying public. But you are right, credit companies are just lying in waiting to take advantage of a tiny misstep for their profit & gain in addition to grabbing the 3% transaction fee. Here in NY 95% of gas stations charge 10-15 cents more a gallon to use a credit card which blows my mind and is misguided greed. Cash has to be counted over and over again, change made, change stored, safe guarded against theft, handled many times, reconciled, transported securely, deposited with fees and manually accounted for into books and records. A single swipe at 3% has to be far more cost effective the all the laborious steps above. Yet no one gets it. If everyone paid in single dollar bills, this would go away in an instant…
I’m amazed at the overall stupidity / ignorance of the credit card paying public. Cash is quick, easy, and private. But if you’re content giving all your information to large credit card companies that will eagerly sell it to whoever can buy then by all means, go ahead and keep it up.
A single bill and the transaction is done, no need to get multiple parties involved and keep track of your buying habits. Good thing people get it. If credit card users knew how their information is being sold, this would go away in an instant.
I’m with you. Use credit almost exclusively. I only use my debit card when getting cash at the ATM and at Costco (don’t have an AMEX). I probably pull an average of $80 per month from an ATM and most of it probably ends up in the offering plate (though most of what we give there is electronic and the cash is small by comparison). To me there is a cost associated with paying cash for something, namely I have to retrieve it from an ATM from time to time.
Andy,
You can use your credit card (non-Amex) on Costco.com to purchase Costco cash cards. It’s nice to still be able to get reward points that way.
Thanks for the tip!
That’s a genius tip!
I’m surprised “checks” is still as high as it is. I hardly ever write a check.
A lot of people continue to pay rent via check. It’s often the only real option. And there are other outlying cases like that. Plus I’m continually astounded and frustrated by how many of my (youngish, Millenialish) peers refuse to transfer money between each other via any means other than cash or check.
I’m not that amazed by the number of debit card users still out there. If you read the comment section of any yahoo finance article pertaining to credit ratings/cards you’ll see a chorus of people that preach credit cards are evil and enslave you in debt. There are so many people that were just never taught responsible spending habits, and when the see someone else get in credit trouble (or they themselves get in it), they tend to vilify the system.
And just to prevent seeming too much on my high horse, I was a primarily debit card user for many years before making the transition to credit cards. Only one time did i ever get screwed over on a transaction, and it was a real bummer to find out that I pretty much had zero support from the bank. The money was gone from my checking account and my only recourse was to get it fixed through the business that charged me. I fortunately succeeded, but it was enough of a scare to make me see the light.
I’ve never understood the draw of using a card that if compromised can lead to the draining of your bank account.
I’ve used credit cards rather than debit cards my entire adult life for precisely the reasons outlined by Jonathan and the other commenters.
I just wanted to add that, even though the card companies are “lying in wait” for me to borrow money one month, I’ve managed to pay every card in full each month for 20 years with one exception. One month, I happened to log into my Chase account and pay it online the very day the bill came out, and apparently it takes a day for the balance on the website to update, so I mistakenly paid the previous month’s balance, which was a good bit lower. When I got the next bill and there were interest charges tacked on, I figured, “Well they got me this one time.” Then I called Chase honestly just to ask how long I needed to not use my card to make sure no additional interest was charged if I paid in full that day, as I had never been charged interest before and the concept was new to me. The Chase rep immediately replied that, not only could I start using the card right away without tacking on more interest, but since I was such a long-time customer, they’d subtract the amount of the interest from the next bill. So, technically, I’ve never paid interest on any card, even the one time I messed up. Benefits of cashback and easier handling of two fraud alerts than debit cards, and no cost to me in two decades.
Interesting but not surprising about the either/or tendencies.
I have absolutely never used a debit card. I have had a credit card since age 16 and continue to use (more and more over the years) for rewards, fraud protection and ease of use. I have never paid a cent to a credit card company (Fees or interest).
I personally feel the opposite of the first commenter. Maybe if I were rich the idea of using a debit card and having my bank account potentially compromised wouldn’t horrify me. Seriously, on principal, I wouldn’t mind switching to cash one day. But the risks of even dealing with cash on a day-to-day basis just doesn’t appeal to me at the moment. In the interim, the credit card rewards are a significant part of our savings and wealth building. It’s literally an extra 4% of income that we can stash away, annually.
P.S. To clarify – we have always just treated our credit cards like they were debit cards.
I dont understand the last graph.
That one is the most confusing. The chart is organized by payment preference. The first leftmost bar is for people whose stated preferred payment method is cash. In turn they use cash for 77% of their transactions, use debit for 10%, and the rest make up the remaining 13%.
People who prefer check use checks for 25% of their transactions (I guess it’s hard to use checks everywhere these days) and cash for 49% (makes sense that they don’t like the new stuff). People who prefer debit cards use debit cards for 57% of their transactions. People who prefer credit cards use them for 50% of their transactions.
After working at a call centre and dealing with debit card users who complained about pre-authorizations that wouldn’t go away once the purchase was finalized and caused their cards to overdraw, I also became a credit card junky. As others have noted, I’d rather have the bank deal with the problem of getting their own money back, than for me to have to fight the bank to prove that I wasn’t the source of the fraud.
Plus, unlike the debit card, I’ve used my credit card to generate points, so the free trips on Amtrak, United Airlines, and the cash back have made it worth it. 🙂
About 3 years after graduating from College (8 years ago), my future wife and I moved all of our monthly expeses and purchases to one credit card that earned rewards. We put everything we can on this card including our utility bills, insurance, food, you name it. Everymonth I get an email alert when the bill is due, and I immediately set an autopayment from my checking account in full the last business day before the due date. Here are the benefits:
1) All our expenses are tracked in one place. Helps me budget better becuase I know when the cash leaves our bank account and every year this card provides a nice summary report of all the money we spend, by category. It really helps to analyze where the money goes. Having better monthly cash management has allowed me to do other things, such as make bi-weekly mortgage payments.
2) The rewards are substantial and add up greatly. Now that we are a family of three, our expenses have increased. We are currently in process of saving enough points to fully pay for 3 tickets to Disney next year.
3) My credit score is just about perfect and over time I have been able to increase my credit line due to my usage of the card and always paying on time.
4) I get an interest float (albeit small these days) on my expenditures by keeping the cash in a savings account until the bill is due.
5) As mentioned by a previous commentor, I have missed maybe 2 payments which were by mistake. Both times the credit card company has waived the fees because I am such a great customer.
6) I never go to an ATM or need cash and instead take out a few hundred every month or so for times when I can’t use credit. Less time at the bank is more free time to do other things.
It’s all about having the discipline to not overspend and always pay in full.
Debit cards = way to get cash.
Credit cards = way to get free stuff and use other people’s money.
Like others have said, reading things about credit, there is the giant chorus who sing loudly that credit cards are evil. I love them for the reasons outlined already:
1. Protection
2. Options
3. Rewards
Every year we open a few cards that have 0% transfer/0% interest and then pull out 10-15k to get a free loan. So easy to set the bank account to just pay X dollars per month for the next 12-14-16 months (always have it paid off 1 month early…just in case). We also open a few to get free miles. This year we got two travel cards. They were used to buy two family trips to visit the relatives. How awesome is it to fly across the country and know you didn’t spend a dime of your own money?
At the end of the year, we’ll roll the credit limits to other cards and cancel them. Rinse and repeat. With good credit scores this game is free money.
Cash is great for quick things but really we go credit a good 90% of the time. And don’t even get me started on how awesome it is to put work expenses on your personal card… free miles/hotel points!
@bgdc – So you do not notice a hit to your credit report on opening new cards with no history, an additional inquiry, and then hit to closing a credit card with some history? My credit is currently been hurt (still above average just not in the 800s anymore) due to co-signing a loan that was defaulted so am wary of trying anything that adjusts the points.
A hit? A new credit card is like 2-5 points. On a score in the 700-800s that’s less than 1% and it corrects again in a month or two. And when I do cancel, I roll the balance limit to a much older card. So on my credit report I closed an account with a $500 limit and it was only 12 months old v. other cards that are decades old with limits in the 30-40 times higher.
Now a defaulted loan, that’s a different thing.
We have been playing this game for so long I don’t worry about it any more as it’s just so darn easy to get free stuff for being responsible.
@bgdc- valid points. and i suppose if one is in shopping around for a loan you just hold off on this “game”. not sure why i have been so afraid i guess just traumatized from old mistakes. will check it out. worth a shot at least with my wife.
Credit card debt is one of the commonest causes of bankruptcy in America. it’s all well and easy for all you financial nerds to spout about the benefits and superiority of credit cards to debit cards. But how many people do you think have that personal responsibility to pay off the credit card every month and earn the cash rewards? Only very few! So, I beg to differ. It’s a lot safer for the majority of the public to use cash or debit cards for most of your transactions, that is, if you want to stay debt free. This is why Dave Ramsey is so successful. That’s what he teaches: nobody ever became a millionaire by earning travel points or cash rewards from credit cards (and neither will using debit card make you one)…but thousands, if not millions, have gone bankrupt because of use of credit cards. At least using debit card will keep you debt free. You can beat that…
Folks selling schemes, like debt-free living and how to flip properties, really just feast on the folks who have no self control or common sense. Be it Tony Robbins or Dave Ramsey, they sell the obvious to people who are not able to make sense of life.
Most business owners live by their credit cards. I’m sure some must be cash only but they’re not common and probably have other issues if they can’t manipulate loans/interest to their economnic advantage.
People don’t go bankrupt because of credit cards or student loans or home loans. They go bankrupt because they have no self control and then refuse to take responsibility for their actions.
I use my credit card whenever possible so I can get the rewards. However, I do have a budget that I follow and if I don’t have that money cash in the bank I don’t spend it. I make sure I pay the credit cards off at the end of the month. I have been collecting rewards and not paying interest for a long time now.
I’m surprised that cash is still so prevalent. To me cash is such a pain, especially when you have to deal with coins and keeping track of everything. I much prefer to check my credit/debit card usage online and keep track of my finances that way instead of trying to remember or log each time I spend cash. I generally carry $20 or $30 in cash for the times when it is occasionally needed and use cards for everything else.
I agree with the posters above about the benefits of credit cards and almost exclusively use credit cards, and of course pay off the bill in full each month. The only place I use a debit card is at Aldi, which doesn’t accept credit cards. For me credit cards make the most sense but I can understand the reasoning for people wanting to use debit instead. For many folks, credit is a gateway to debt, and there’s certainly no advantage in carrying a CC balance. So, I fully support the use of debit cards if someone has trouble keeping their spending in check.
Cash is private and for me it’s just as easy to use. I would prefer my information not be sold to anyone that wants to buy it.
(And despite the privacy policies, as more financial companies start to merge then it becomes legal for them to share among themselves.)