If Cash Is King, Do We Still Need Credit Cards?

If cash is now king, could Americans who give up their credit cards live like royalty? Being forced to live entirely within your means may make you feel rich in a way, but trying to get along in the modern world with no credit at all can be a royal pain.

Besides the more frequent trips to the ATM, cash-only customers face a much more difficult time in our plastic-dependent society when buying big-ticket items like homes, cars and washing machines, not to mention emergency spending for, say, a furnace that goes kaput in the middle of winter.

"Can consumers live in a cash-only world? No," said Britt Beemer, chief executive of America's Research Group. "But they can live in a more cash-oriented world than they do now. That's happening as more and more people are willing to make an effort to do so."

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As consumers grapple with spending in an economy marred with rising unemployment, growing numbers of foreclosures and what's expected to be an unprecedented spike in credit-card defaults this year, pulling in the reins makes sense.

As Beemer said, many consumers are voluntarily putting themselves on a credit-card-free spending diet while others are being forced to do so by banks, lending institutions and credit-card companies that are reducing limits and in some cases yanking credit lines altogether. For those folks, the use of debit cards that won't accept transactions larger than the available funds in an account has replaced the credit card, along with alternative payment means such as eBillme and PayPal.

"It seems that people spend less when they don't have a credit card available," said Paula Peter, an assistant professor of consumer behavior at San Diego State University. "With cash, your spending ability is limited."

According to eBillme, the cash-based payment alternative, its fourth-quarter online spending index found that 46% of customers said they would step up their use of such methods to finance purchases. The first-quarter index released this past week reported that 42% of consumers have used their credit cards less in the last 90 days in favor of non-credit payment options.

"The shift from credit toward cash-like options is the desire for consumers to control their financing," said Marwan Forzley, chief executive of eBillme. He said he sees "a clear shift in attitude" to pay as you go.

So does the Federal Reserve. In its most recent data, consumer credit fell at an annual rate of 3.75% in November. Revolving credit was down some 3.5% while nonrevolving credit sunk at an annual rate of 4%.

Meanwhile, the most recent data from the Bureau of Economic Analysis showed that U.S. households upped their saving rate to 2.8% of their disposable income in November from less than 1% from 2005 to last April.

That's good news. But though living on a cash-only basis may be healthy, it's not always practical. "There are cases when you absolutely need to use credit," Forzley said.

Here are a couple of big ones: Who wants to walk around with $10,000 in their pocket to pay for a home-theater system or even $500 for a new suit, shoes and accessories?

Using credit cards to fund purchases isn't a bad thing. In fact, there are many positive to it that go beyond not having to carry wads of cash. One can build a good credit history, which in turn can make it easier to get loans at low interest rates for a home or a car or to rent an apartment.

And don't forget about all the perks that some credit cards offer, like redeemable mileage for air travel, hotel stays or a bevy of discounts. Some will even help pay for prescriptions and other health-related items.

But using credit cards to bankroll a lifestyle that's out of sync with your income could be destructive to your financial health. "If we keep postponing what we pay off, at what point does that crash?" Peter asked.

She warns consumers who want to shift to cash to do it slowly. "It's a big challenge to change your habits," she said. Here are some tips:

• Make a plan. Use credit cards to get gas or big-ticket items but commit to using cash when shopping for everything from food to clothes.

• Make a budget before you shop. If the fear is you'll carry too much cash, make multiple trips.

• Trash the plastic. But do keep the debit card.

• Pay them off. If you keep any credit cards pay them off in full each month. That's not a new idea, but sticking to that resolve achieves much the same result as using all cash without the drawbacks.

Jennifer Waters is a MarketWatch reporter, based in Chicago.