In 1949 a New York businessman who was dining out was about to pay for his meal but was embarrassed to find he had left his wallet at home. The next year he started Diners Club, which allowed wealthy New Yorkers to pay for meals on credit with a cardboard card. Thus the credit card was born. It took another 11 years for cards to be issued in their familiar plastic format but the concept had already gained worldwide acceptance. Last year, for the first time, American consumers purchased more goods and services with plastic cards—debit and credit—than they did by cash or check.
The card has made consumption convenient but also has introduced danger into the simple equation of making a purchase. The problem is that when consumers use plastic they often spend more money than if they had used cash. For instance, McDonald’s earlier this year began accepting credit cards and found that the average transaction for a credit card customer was $7, compared to an average of $4.50 for a cash customer.
Consider that Americans spent $2.2 trillion with plastic cards last year, and you begin to see the problem. The latest surveys show that 60% of credit card holders carry a balance each month. The average balance is $1,900, the Federal Reserve says. Average fixed card rates of 12.68% and rates for late payers that are as high as 29% compound the problem.
Spending may feel good, but it doesn’t help you build up long-term wealth. Here are some tips for reducing your plastic use:
- Go on a spending diet. Don’t use a credit or debit card for a week. Pay for everything with cash or a check.
- Don’t use a credit card at all. Substitute a debit card linked to your checking account. Know your checking balance and don’t spend more than you have.
- Use plastic only for those purchases that require it, such as hotel and rental car reservations. Otherwise, use cash or a check.
The results will be impressive. You won’t build up debt you can’t pay off. You won’t pay interest on minor purchases such as hamburgers and aspirin. You won’t have to worry about $35 late charges and over-limit fees. And you won’t dread opening the mail.
