Cash or Credit Card? Does It Make a Difference? It Does To Your Brain & Your Future

Think what you do when you run in debt; you give to another power over your liberty.

~Benjamin Franklin~

 I'm no economist--in fact, I never took an economics course.  But I remember how it used to be, back before 15 year olds had credit cards & shady mortgage lenders were authorizing $400,000 mortgages to people who earned $25,000 a year.

Yesterday, David Brooks offered up some sobering facts about how far we have come from Benjamin Franklin's ethic of "hard work, temperance and frugality".  His  NYT Op-Ed piece stems from a recent report on the sorry state of our "financial decadence":  For a  New Thrift: Confronting the Debt Culture.  Brooks calls this one of the most important economic reports you'll read this year.

What does any of this have to do with health and happiness?  Plenty.  We're all in this mess together.  As Barbara Dafoe Whitehead, the author of an essay that summarizes the New Thrift says, "A society in which ever more of us are over our heads in debt--a society in which a place like Bedford Falls* seems no longer to exist, except in our fading collective memory--is unlikely to remain a thriving society for very long.  *(Remember Jimmy Stewart's It's a Wonderful Life?)

Anyone Remember the Seventies?

• We had to have at least 20% down to buy a house--the monthly mortgage payment couldn't exceed 25% of our net income--the bank was local and there was a very strict qualifying process.  Most banks would consider only 1 person's income for qualification.  After all, what if you start a family? Our goal was to make extra payments whenever we could so we could pay off our house ASAP.
• I bought my groceries with cash & since this was before calculators, I used a red plastic counting gizmo to count everything up before I  got into the check-out line.  I would have been mortified if I didn't have enough money.
• It was extremely hard to qualify for a credit card, and even harder to get one if you never had one.
• If you really wanted to buy something & didn't have the cash, you would put it in "WILL CALL". You didn't get your merchandise until it was paid for. Or, you saved up until you had enough money to buy what you wanted.

Today

• Between 1989 and 2001 credit-card debt nearly tripled, from $238 billion to $692 billion.  By last year, it was up to $937 billion.
• You're either in the investor class with tax-deferred savings plans and financial advisors, or the "Lottery Class"--no 401 K's, just credit cards, payday lenders & lottery agents.
• 56% of students in their final year of college carry four or more credit cards.
• Households with incomes under $13,000 spend, on average, $645 a year on lottery tickets, 9% of their income.

Neuroeconomics-Credit Cards & the Brain

• Jonah Lehrer, a young savvy science writer who writes and blogs about neuroscience has some great insights into the perils of plastic.
• "When we buy something with cash, the purchase involves actual loss-our wallet is literally lighter. Credit cards, however, make the transactions abstract, so that we don't feel the downside."
• George Loewenstein, a neuroeconomist at Carnegie Mellon says, "The nature of credit cards ensure that your brain is anesthetized against the pain of payment."  He demonstrated this with brain imaging.
• An MIT study published in Marketing Letters, called "Alway Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay", set up an interesting experiment.  The researchers organized a real life sealed-bid auction for tickets to a Boston Celtics game.  Half the participants were told they had to pay with cash; the other half were told they had to pay with a credit card. Guess what? The average credit card bid was twice as high as the average cash bid.  Using plastic promoted reckless spending, making it much easier to spend beyond one's means.

For anyone over 40 who remembers what it was like with local banks & bankers who cared about the community, manageable college tuition & student loans, family-owned businesses and no credit cards--it really is an out-of-control economic landscape.