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Credit & Debt

Consumers Cozy Up to Currency

More people favor cash and pay-as-you-go debit cards.

Courtesy of lingering economic malaise, cash -- the ultimate budgeting tool -- is making a comeback. Certainly, our relationship with credit has soured. People have been paying down debt and closing credit card accounts for some time. Despite a pre-holiday uptick in revolving debt last December (almost all of it credit card balances), such debt has declined 17% since August 2008. Debit cards have become America's favorite pay-as-you-go alternative, but people are rediscovering cash, too.

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In a 2010 survey by Mercator Advisory Group, only 60% of households said they held a credit card, down from 74% in 2009. Of those who held cards in 2010, 42% said they were using them less; 28% of those who were cutting back said they were trying to pay with debit cards more often, and 17% were determined to fund purchases with greenbacks.

Currency carriers might be on to something. "There's a forced discipline if you're using cash -- you can only spend what you have," says Ron Shevlin, an analyst with the Aite Group, which recently published a report showing that Gen Yers (people ages 18 to 30) in particular were using cash more often.

Part of the discipline comes from the tangible nature of money, which makes you physically aware that you're spending it, says John Kestner. As a graduate student at the Massachusetts Institute of Technology last year, Kestner designed a line of wallets that take the abstraction out of spending. One wallet helps you stick to a budget by becoming difficult to open once a preset threshold is approached. Another buzzes whenever your bank processes a transaction. (The wallets work by communicating with your smart phone.)

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Regardless of whether the futuristic wallets ever find their way into stores, consumers may find benefits to using cash more often. For instance, you don't have to worry about identity theft (but if your cash is stolen, it's probably gone for good). And recent legal and regulatory developments may soon empower merchants to give discounts more often when you pay with cash or a debit card.

In our digital society, a pocketful of cash may seem archaic. In January, Starbucks rolled out a platform that lets customers pay by smart phone, and the iPhone 5, due out later this year, is rumored to have new "wave and pay" technology. But with no physical currency changing hands, there's less sense of buyer's remorse when we spend frivolously. Worse, consumers spend 20% to 40% more when making contactless payments, research shows. Even our diets improve with cash. The Journal of Consumer Research reports that people are more likely to buy unhealthy food when they pay by credit card than when they pay with cash.

You don't have to kick the plastic habit completely or forgo the coolest apps. Cultivate a more visceral relationship with your money by visiting www.daystopay.com to calculate what a purchase will cost you in work hours. Or resolve to be diligent about tracking your spending with a budgeting program. Or you could try the old envelope trick. Put enough cash in separate envelopes to meet expenses. When the envelopes are empty, stop spending.

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