Yesterday I discussed the financial benefits of using credit cards.  Today I’ll cover the non-financial benefits.  I’ll discuss why some people don’t use credit cards despite all the benefits when used properly.  Finally I’ll discuss the possibility that credit cards raise consumer prices.   

Non-Financial Benefits

Let’s see, credit cards give you cash savings of over $1,000 per year, plus much bigger savings from lower interest rates on mortgages and car loans.  Do you need any other benefits? 

How about convenience!

Years ago I carried a blank check in my wallet just in case a place didn’t take credit cards.  After I used it I would forget to replace it.  It was a hassle to try to remember to replenish it each time. 

I never carry checks anymore.  It’s too much of a hassle.  Besides, anyplace I can afford takes credit cards anyway.

I never have to carry cash.  I don’t have to scramble looking through dresser drawers and cabinets to find cash before I leave the house. 

If my wallet is stolen, I’d much rather lose credit cards than cash or check.  I can cancel my credit cards quickly to minimize any losses.  But if I lose cash, it’s gone.  If I lose a check, my bank account number is vulnerable.  It is hard to recover money from a compromised bank account.

Think of all the convenience products you buy.  Dishwashers, washing machines, and GPS make life more convenient.  They also cost money. 

Credit cards, on the other hand, make life more convenient and they don’t cost a thing if used properly.  They save you money.  It’s not often you get a convenience product that saves you money.

Mind Over Money

I’ve made it sound like a no-brainer to use credit cards.  For most people, it is.  Then why does the financial press keep telling us to shred our credit cards?  And why do some people avoid credit cards like the proverbial plague? 

In a word, it’s temptation.  Some people have credit cards that magically jump out of their purse and buy things at the mall.  They spend money they wouldn’t otherwise spend. 

If having a credit card means spending yourself into a money-death spiral, then you shouldn’t have a credit card.  If you’re paying exorbitant fees and unthinkable interest rates on your credit card each month, you should shred it.

But you should understand what you’re losing.  Your inability to overcome your co-dependent love-hate relationship with consumer debt costs you a lot of money.  It’s not just the high interest rates and fees.  It’s also about $1,000 per year, plus tens of thousands when you get a mortgage!  It’s a tremendous price to pay for refusing to develop good money habits.

Understanding the numbers should motivate you to develop better money habits. 

Do Credit Cards Raise Consumer Prices?

When you use a credit card, the credit card company charges a fee to the merchant based on the amount you charge.  Reward cards are basically sharing this fee with you. 

What does the merchant do to recover the fee?  He recovers it partially through higher volume.  Some customers are willing to buy with a credit card things that they wouldn’t buy with cash or check. 

He may also recover the fee by raising his prices.  To the extent he raises his prices to recover the card issuers’ fees, you are paying higher prices whether you use a rewards credit card or not.  If you don’t use a rewards card (e.g. if you use cash, debit card, non-rewards credit card, or personal check), you are subsidizing those people that do use a rewards card. 

How much is this subsidy?  How much higher are prices because of credit cards?  I haven’t done any research on the subject.  Based on the fees the merchant pays to the credit card companies and the amount the credit card company shares with you for using their reward card, it probably couldn’t be more than a 1% increase in prices.  One percent isn’t a huge amount, but it’s something.  If you spend $2,500 each month, that’s $25 each month.  Or $300 annually.  It’s not nothing.

Summary

For people with good money habits (which is most people), you should use credit cards.  As long as you use them responsibly, credit cards will save you significant amounts of money and add convenience to your life.