#11 Creating Wealth: Cash Vs. Credit
Updated: Jun 21, 2021
Creating Wealth is an in-depth conversation between Bill Taber, an experienced financial advisor, and his millennial daughter about personal finance, investing, and financial planning.
Bill Taber is President of TABER Asset Management, a Registered Investment Advisor (RIA) and fiduciary firm located in Des Moines, Iowa since 1998. For decades, Bill has provided investment management services to clients, creating wealth, building wealth, growing income, and preserving capital for each and every client. TABER offers personalized asset management, wealth management, retirement planning, financial planning, and services such as 401(k) rollovers.
His daughter, Anastasia, works in accounting at a global law firm in Washington D.C. She enjoys discussing finances and her cats’ latest antics with her dad.
Creating Wealth Episode 11: Cash vs. Credit: What are the benefits of paying with a credit card vs. paying with cash? As society transitions to more and more cashless based transactions, what are some important things to keep in mind as a consumer? Bill gives a brief overview of the history of the credit card industry, discusses the pros and cons of using credit cards, and Anastasia mentions what one of her favorite science fiction writers, Margaret Atwood, has to say about living in a cashless society.
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Anastasia: Welcome to Creating Wealth, I’m Anastasia.
Bill: Hi, I’m Bill.
Disclaimer: The views expressed today are our own, solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investment strategy. The views are subject to change and are not intended as a forecast or guarantee of future results.
Anastasia: Today we’re going to talk about cash money versus credit. I think many people are at the point where they’re not using cash money anymore. I think it would be interesting to talk about the emotional ramifications of paying for everything with credit, but first, Dad, I wanted to get your perspective since you existed long before credit cards came about. (Laughs) I see your smile.
Bill: Yeah, I admit to being born before the credit card industry actually started so I’ve watched the whole thing evolve. It’s been fascinating.
Anastasia: Yeah, so I thought it would be great to get your perspective on the history of credit cards.
Bill: Sure. The credit card industry grew rapidly in the 1960s and what I initially learned about it was from watching my dad’s behavior. He used it as a convenience, as a substitute for carrying cash. When he made a purchase he paid the bill off to the credit card company within 25 days to avoid having any interest charges on his account. The industry grew massively in the 1970s and 80s with brilliant, genius marketing campaigns. There were television campaigns that saturated the airwaves, they were on constantly. It’s like you have these catchphrases in your head that you didn’t realize were in there but they are and even to this day when I thought about Visa--Visa grew worldwide with a campaign of “Visa: It’s everywhere you want to be,” and it worked in signing up credit card users and merchants. And Mastercard’s campaign was “And for everything else, there’s Mastercard,” which promoted the idea of using plastic for everything instead of using cash or paper currency. The credit card companies figured this out and figured out early on that they could charge interest rates of 15%, 18%, 24% or higher and that it was a very lucrative business. Loans were created using unsecured lines, meaning that you didn’t have to offer any collateral back. The companies knew that a certain number of users would default on their payments but because their interest rates were so high, they knew that they could continue to make a lot of money on it. And some states had what are called usury laws. Usury laws protected consumers from unreasonably high loan rates. So the major banks that issued these cards would then move their credit card operations to states that did not have usury laws, like South Dakota, that allowed them to charge pretty much whatever they wanted to charge. So throughout history, lending like this had been considered a form of slavery, financial slavery of the borrower to the lender and it plays off of the human tendency to want what you want now and to avoid deferring personal gratification. By the 1990s and 2000s, credit card usage had spread around the world and credit card issuers got even more aggressive. They started targeting teenagers and they relaxed their lending standards even more by marketing the cards to these young people or students that didn’t even have a job or regular source of income. My son’s experience at the university is indicative of this. On his very first day of college registration, there were several credit card companies that had set up tables offering free pizza or free t-shirts for signing up for a card.
Anastasia: They really know how to speak to the college population.
Bill: Yeah and so he signed up for two.
Anastasia: Oh that’s funny (Laughs).
Bill: (Laughs) In the 1960s and 70s it was rare that a person had more than one card. But by the 2000s, the issuers didn’t care if someone already had six or more different cards. They just realized that the more people put on their cards, the likelihood would be that they couldn’t pay it off, which would incur higher interest charges and would allow them to become very, very profitable. By the 2010s, credit card companies, again, brilliantly marketed this “cash-back” idea that we see today.
Anastasia: Oh yeah, people eat that up.
Bill: It was just brilliant. Many users don’t understand that there’s a surcharge to the merchants at the point of sale, and that charge can be as high as 3.5% of the total purchase that they’ve made, which credit card companies then use part of that to rebate back to users as an incentive to keep paying for things with their plastic. And so it just keeps proliferating and it keeps people using it more and more because now they’re getting rewarded immediately with points or cashback or whatever.
Anastasia: Well, what’s interesting about that then is doesn’t that mean that the merchants are having to kind of increase the price of their goods in order to pay that 3.5% to the credit card companies?
Bill: They either have to increase the price of their product or service or they have to cut into their profit margins, being forced to allow people to pay by credit card. An example of that, I just bought a new furnace, a replacement furnace, it was like $15,000. And for the first time, in quite a while, this merchant, this company said, “You know if you write us a check for that, pay us in cash immediately, we’ll discount that by about 3%.”
Anastasia: (Laughs) They’re like, “Please.”
Bill: But if you put it on your credit card then we’ll charge you that full amount.
Anastasia: Um, yes. I will bypass the credit card company.
Bill: Yeah, that saved me hundreds of dollars.
Anastasia: And the credit card company is like, “No, that’s not okay. That’s our profits!”
Bill: Yeah, that’s how it works. (Laughs)
Anastasia: So it’s like no matter what we’re paying—even though we get a cash rebate—we’re still paying for that service.
Anastasia: That’s fascinating. I think it’s probably something that people don’t think about actively every time they make a purchase with their credit card—“I’m actually paying for this.”
Bill: Today there are some merchants that say, “No it doesn’t matter if you pay me by check or cash or if you pay me by credit card, it’s no difference.” And so that kind of obscures the process. Well for millennials and Gen Zs that are coming of age of adult responsibilities, the step into using debit cards and mobile payments is just a natural progression of paying with plastic credit cards. Now that the millennials are in the habit of doing this it’s like okay, debit cards and mobile payments, same thing, it’s just a matter of convenience.
Anastasia: I know, Venmo is the greatest thing ever and our generation just absolutely loves it and they just send each other money—rent, utilities, food—when you go out to eat you don’t have to worry about who owes what, you can just Venmo people specifically for what you ate and then there’s no awkwardness of: “Well, I covered last time.” “Well, you ordered three appetizers last time!”
Bill: Yeah I just think that is the natural evolution of just more and more people, it’s become so ensconced in our culture now that it’s just moving in that direction.
Bill: So here we are in 2020 and we’re in the middle of a pandemic and there’s more online purchases that are going on and less handling of cash and paper currency that have the opportunity to spread the disease.
Anastasia: Isn’t the country having a national coin shortage right now?
Bill: I have heard that, yes. I probably got about $80 worth of coins in my house here that I need to put back into circulation so I’m a part of the problem. (Laughs)
Anastasia: (Laughs) We just deposited $40 worth of it at the store. We used one of those Coinstar machines and they usually charge a percentage, but we got it all in Amazon gift card credit. So then I have to feel bad about giving Amazon even more money.
Bill: Yeah, Amazon is pretty smart. So that basically is a sixty year history of where the industry is at. It has become ubiquitous.
Anastasia: So I actually had a few friends debating when is a good time to get a credit card, because both of their sets of parents had said, “Don’t get a credit card until after college.” And I know with me, you were trying to help me get a credit card during college but without having you on the account, it would be just me. But I was trying to get a credit card after the financial crisis and after that they were being very careful—
Anastasia:--with who they were giving credit cards to. What’s your perspective on when people should start getting credit cards?
Bill: My perspective is that after you have a job that provides you with a source of income and the ability to repay the loans is the best time. Personally, I started working when I was 16 years old, and so I had income from a job and my dad said, “Go ahead and get a credit card.” Since I modeled his behavior of you get the bill and you pay it off right away, within 25 days, so that there’s no interest. I mean that’s just the way that I did it. I didn’t have any other mindset in my head. Today, since credit card companies are now targeting teenagers, I understand why some parents are counseling their children to wait until after college to get any of the cards and that’s because that’s when they’re going to have a job and the ability to repay the loans.
Anastasia: So, when you have your first job is a good time to get one?
Bill: Yes, I mean with your situation, you didn’t have a consistent job obviously when you were in college, but you had enough money that you could pay the things that you put on there. I think you were very prudent about what you put on the card. It was only major necessities. The main thing that I’m thinking of was just the airfare to go from Georgetown to Iowa and back.
Bill: And it was just a convenience matter for us as parents to have you be able to pay for airline tickets in that manner.
Anastasia: And there is something to say about having a line of credit open earlier. Because that factors into your credit score?
Bill: Yeah, that gets into what credit cards can do for you, obviously one of them is that it allows you to establish a payment history that could lead to you getting lower interest rates, say on the purchase of a home.
Anastasia: I recently experienced that and it was pretty great.
Bill: Do you want to talk a little bit about how that went?
Anastasia: Yeah, I mean so I just bought a home with my fiance. When you apply for a loan, you do a pre-approval and they run your credit with the three credit agencies. If you have really good credit, that can secure you a lower interest loan and also give you more room to go for a more expensive home. Generally, you don’t want to go for too expensive a home, but it was good to know that we did have the option to go higher if we wanted to. So yeah, those are two basic benefits. We actually secured a super low rate.
Bill: Mhm. Another example would be with car loans. Obviously if you can pay with cash for a car, that’s great, but unfortunately a lot of people aren’t able to save ahead of time to buy cars so they have to finance it. And if you’ve got a good credit score and a good payment history then you can get a lower interest rate on a car loan very easily. That’s one thing that a credit card will do for you. And the main thing I think is just convenience. I mean that’s how they got started way back when it was just easy to pay for something with a card. You didn’t have to carry the cash. Another element is if cash is lost or stolen then it’s basically just gone, whereas credit cards can easily be replaced and you’re protected against fraudulent charges. If you lose your card and somebody picks it up and starts charging it places, if you’ve notified the credit card company right away, they will not hold you responsible for any of those charges. So those are some of the real plusses.
Anastasia: Along those lines then, maybe we should talk about what are some of the negative effects of having a credit card? Because paying for things with credit has a different effect than paying for things with cash.
Bill: You can’t spend money on something that you don’t have, so if you don’t have money in your wallet or purse to pay for it then you can’t buy it. That’s one reason why cash is better than credit cards. The second would be, you tend to feel it more when you spend cash. For some reason, you look at that $20 bill and you have an understanding of what you had to do physical labor wise or mental labor wise to earn that and when you spend it it’s like it leaves your hand. When you swipe a credit card, you just don’t have that same sensation. (Laughs) And I think somehow the credit card companies know this.
Anastasia: Oh they 100% know it.
Bill: Also, savings from cash is a better emergency fund than using a credit card. Another way of saying that is basically don’t go into debt to cover emergencies. Some people basically if they don’t have savings they figure, “Well if something unexpected comes up I’ll just put it on my credit card.” Well, if that’s something unexpected is something they haven’t planned for or budgeted for then the debt doesn’t necessarily go away that easily. And debt starts to pile up on credit cards. Cash requires saving money before you spend it. Credit cards allow you to buy things before you’ve saved the money. American consumers currently have about $4.1 trillion in credit card debt. What’s the negative to that? Well the negative is that it tends to lead to financial pain and potential bankruptcy if you can’t make the payments.
Anastasia: It’s worth noting that interest rates on credit card debt are much higher than other kinds of debt.
Bill: And they’re higher because they’re what’s considered an unsecured loan. You use the example of the house that you recently purchased. They gave you a 3% loan because if you don’t make the payment on that, they have collateral in the form of the house. In other words, they’ll take the house from you. And you’ll be homeless. So you have a high incentive to make the payments. But when you borrow money against a credit card, they don’t have any collateral, they don’t have any security. So if you make the payment, that’s fine. If you don’t, the credit card company is out that money. But as I said earlier, they figured out that if enough people, and they have millions and millions of people that borrow money at these really high interest rates, pay off and pay the high interest rates on those, that it more than covers the losses that they incur as a result of a few people not making enough payments. Does that make sense?
Bill: And it’s important to have limits in mind when you buy things. The number one rule of wealth accumulation is spend less than what you earn. It’s important to have those limits in mind when you’re buying things because that’s what budgeting does for you. WIthout the internal control, spending can easily get out of control. And so learning how to budget is an important part of being successful if all you’re going to do is pay for things using plastic.
Anastasia: Yeah, I can’t remember the last time I paid for something with cash. Personally, I look at my expenses regularly, like daily, and so I have a very keen understanding on what I’m spending my money on. Just by keeping awareness of that then I’ve been able to pull in a healthy savings rate.
Bill: Yeah, and I think that’s the crucial part of this that if someone is going to pay with exclusively plastic they have to have some sort of awareness or system or budget or controls or whatever to keep them from just pulling out the plastic whenever they want to get something, because as I said it’s a human tendency to want what you want now. So using cash is kind of a mental system in a way. This Gail Vaz-Oxlade that we talked about that does Til Debt Do Us Part TV shows would teach people that had used credit cards too much to use an envelope system. Have you ever heard of an envelope system for using cash?
Anastasia: Yes. You have your budgeting categories and you put the specific amount of money into the envelope every month.
Bill: Yes, a certain amount of money that you decide ahead of time goes for food, a certain amount for gas, a certain amount for entertainment, and you put that physical cash in those envelopes and then when you incur an expense in one of those categories you take the cash out of that envelope. You put the receipt in so that you can track it. And you know that by the end of the month, if there’s no cash left in that envelope, you can’t spend anymore money on those things. And so that’s just another way of helping you develop this internal awareness of being able to track what you’re spending and spend less than you earn.
Anastasia: Yeah, that’s a good strategy. Along the lines of cash is good, or that we should keep cash around, because we’re not saying that credit is terrible, you just have to keep in mind what the pros and cons are. But in terms of we should keep cash around, Margaret Atwood, famous science fiction writer, had a really interesting quote about cash money. She had written The Handmaid’s Tale which is a dystopian fiction about women who are severely oppressed and controlled. It’s a future society so it’s looking at what could happen. She was very insistent with all of her science fiction that she borrows from things that have actually happened. So she had this news article from January of 1984 about debit cards. She said that when she came up with ideas for The Handmaid’s Tale, she figured that if you want to get women back in the home, you have to reverse the financial progress that they have made over the past 150 years, because they came from this point where they couldn’t control their own money and they didn’t really have any jobs that weren’t servant jobs, so in the 20th and 21st century when they gain the right to control their own finances, own their own bank accounts, own their own houses, you would, in order to get them back to a place where they couldn’t, you would have to cut off their access to credit. Credit cards allow a society to do that very quickly should you want to--any form of electronic sorting and tagging allows you to quickly control consumers that wasn’t possible in a way before. She says that cash money is actually more fluid than credit card money and much harder to control your access to. So she was saying, “Don’t get rid of cash money.” (Laughs)
Bill: Hmm, okay.
Anastasia: Yeah, I just thought that was a really interesting point she made. I think we are, as a society, trending towards everything being credit and it is a little unsettling how these companies have these full consumer profiles of us and all of our information and what we spend, how we prioritize our money.
Bill: Well, there’s certainly direct marketing companies that benefit by knowing what consumer habits are. For example, when I go to the grocery store, I have this card that I can show to them that basically allows me to get a few cents off per gallon on gasoline from a set of gasoline stations that they also happen to own. And what it does is send an immediate email to my spouse, my wife, because it’s her card so that she can see everything that I’ve purchased (laughs) and it also sends to the grocery store a record of how much it was produce, how much of it was meat, how much of it was processed foods and etc etc which helps them with their operations and--
Bill: --Inventories and future buying tendencies, etc. So, yeah it’s just more and more information. Cash basically bypasses all of that and because when you get the cash in your hand and you spend it, there’s no record.
Anastasia: They can’t track it. Which in turn also makes, if you’re budgeting and spend most things in cash then you have to be pretty diligent about keeping track of cash receipts and making sure that you’re accounting for all of this money you’re taking out of the ATM. But it’s interesting. There are definitely pros and cons to each currency and I would say if anyone in the future ever says, “Let’s get rid of cash money,” let us all know that we should protest that (laughs).
Bill: Yeah, that’s where I find this thing about cryptocurrency is interesting and the trend towards bitcoin. I mean obviously the world is shrinking, the internet has brought more and more countries and people and cultures together and obviously there’s a backlash going on right now but it is moving kind of in that direction and if you think about a world where instead of each government having its own currency, there’s a single currency and how that operates. It’s just going to be fascinating to see the way that this all evolves.
Anastasia: Yeah, and that would probably make another interesting episode--
Bill: There’s just all sorts of stuff to talk about.
Anastasia: I know! It’s kind of like money is related to everything. Weird!
Bill: It is! Some people think money is boring...
Anastasia: (Laughs) Cool, well did you have anything else you wanted to mention?
Bill: No, nope--
Bill: --That’s all I’ve got today. Thanks!
Anastasia: Thanks Dad!
Anastasia: Thank you for listening to Creating Wealth! If you liked our podcast, please subscribe and consider recommending it to your friends or leaving us a review on your podcast app. We would love to discuss your questions. You can email them to us at email@example.com. You can also find full transcripts of every episode on taberasset.com. That’s Taber with an “e” not an “o.” Thank you for joining us on the path to financial abundance. We’ll see you next time!