Giulia Rozzi's unhealthy relationship with credit cards started in college. Surrounded by friends with frivolous spending habits, Rozzi says she adopted the mindset of "spend now and deal with the consequences later." That approach continued after graduation, when she moved to Los Angeles to pursue comedy and acting. Her cash flow was unsteady, but that didn't stop her from using a credit card to bankroll a wealth of discretionary expenditures. A well-deserved pedicure? A fancy dress? A last-minute trip to Las Vegas with friends? All it took was one swipe of the credit card.
She hit a low point in 2004, having racked up $5,000 in credit card debt. Her parents agreed to pay it off – on the condition it wouldn't happen again. "The agreement with them was I would never get another credit card, and of course, I did," Rozzi says. Years later, when she found herself drowning in $20,000 in credit card debt, she decided it was time to give up plastic for good.
Rozzi is among a number of consumers who choose to live without credit cards. Some 29 percent of 1,004 respondents ages 18 years old or older to a 2010 poll by CreditCards.com said they did not own a credit card – around a 10 percent jump from the number of respondents who reported having no credit cards in 2009. For many people, saying goodbye to credit cards helps them stay out of debt and take more control of their finances.
Without thousands of dollars of credit at her disposal, Rozzi no longer makes purchases with money she doesn't have. Today she pays for most items with cash and spends less. She says cash transactions make her think twice before making a purchase – significantly reducing her propensity for impulse purchases. A 2008 study led by Priya Raghubir, a professor of marketing at New York University, reinforced evidence from earlier studies that consumers tend to spend more money when paying with credit cards than they do when paying with cash.
Credit cards also alter a consumer's mindset when contemplating a purchase. A 2012 study published in the Journal of Consumer Research found shoppers who charge an item to their credit card focus on the benefits of the purchase, while those who pay cash focus on the cost.
Consequently, many consumers who give up credit cards begin to pay closer attention to where their money is going and develop the discipline to spend less, says Gail Cunningham, vice president of membership and public relations at the National Foundation for Credit Counseling, a network of accredited and certified credit-counseling agencies. "Credit cards distance you from your hard-earned money," Cunningham says. "We've found people who decide to live on a cash basis end up saving around 20 percent of their previous spending – and they do it without feeling deprived."
However, those who go the credit card-free route may still encounter problems, including difficulties when booking hotels and renting vehicles. Such transactions typically require at least a debit card. "People who live in a cash-only world are going to find themselves marginalized and inconvenienced," says Ben Woolsey, director of marketing and consumer research at CreditCards.com.
[Read: Financial Strategies for a Lifetime.]
Debit vs. credit card protections. Many credit experts, including Woolsey, advise credit card-free consumers to use a debit card that's attached to a checking account so they can still make purchases without having to carry wads of cash.
But debit cards don't offer the same protections as credit cards. The Fair Credit Billing Act covers consumers from fraudulent credit card charges. Consumers must submit a written dispute (some offer electronic submission) within 60 days after receiving an account statement that contains billing errors. The creditor will then investigate whether or not the charges are from a third party and decide if the money will be reimbursed to the consumer. The FCBA doesn't cover debit card users, though. Instead, such consumers are liable for up to $50 of unauthorized charges if they report a lost or stolen debit card within two business days. If the report is filed after two business days, the cardholder is liable up to $500. And if unauthorized transactions aren't reported within 60 days, the cardholder could be liable to pay the full amount.