The Value of Increased Buying Power

Hard money” and “plastic money” carry different connotations. Hard money (i.e., actual dollars in your wallet or checking account) tends to be perceived as finite—if you run out of cash, you’ve exhausted your buying power until you obtain more of it. On the other hand, plastic money, such as credit cards, can expand your buying power up to the account’s credit limit. When buying something with a credit card, people can be less quality conscious, may not negotiate as skillfully, and may pay more for the item than they would have if they had purchased it with cash.

Buying on credit can not only be a great convenience, but it can also make sense when you are temporarily short of cash. However, when using a credit card becomes your standard way of doing business, it can have some highly undesirable consequences. One way to guard against credit card abuse is to ask yourself two questions when making a credit card purchase: First, would you still purchase theitem if you were paying cash? Second, would you pay the same price if paying by cash?

By keeping the focus on value, you can better distinguish between items you would like to buy and items you absolutely must have. Making this distinction between wants and needs can help you avoid the major pitfalls of buying on credit—overpaying on individual items and spending beyond your means.