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Paper cash squeezed by plastic

| Saturday, May 11, 2013, 9:00 p.m.

Over many years, consumers have moved from precious metals to cash and now, increasingly to plastic. As credit cards represent loans and not money, the Federal Reserve does not consider them to be part of the nation's money supply. Nevertheless, statistics show consumers more often favor plastic over cash when making purchases.

There are 185 million consumers with credit cards, according to CardWeb.com. The average person carries 3 bank issued cards and 4 retail credit cards, which means there are more than 1.3 billion credit cards in circulation.

A recent survey by Dove Consulting and the American Bankers Association reported some 53 percent of consumer purchases are made with plastic. This represents an increase of some 23.3 percent in just the past 14 years.

The attraction of plastic is clearly growing fast. There are a number of reasons for this, including the most obvious: convenience.

Plastic is far more convenient than cash, which can cost over $3 in fees if you withdraw from an ATM that's not in your bank's service area. Credit cards are also less prone to theft or being stolen. Many banks or card services offer protection if you promptly notify them.

Spending transactions on credit cards offer a most convenient paper trail for businesses and taxpayers. This saves bookkeeping time and expense.

Because money charged against a credit card is at its heart a loan, plastic money has attractions when unemployment is high and banks are not lending. Introductory zero interest charges on new credit cards are particularly attractive. By transferring balances cleverly, consumers can obtain zero interest loans so long as they repay them with new zero cost money before the non-interest period ends and credit card charges kick in.

Unlike cash, many credit cards offer rewards for plastic purchases, such as frequent flier and purchase points. Even cash-back cards are becoming widely circulated. Some cash-back cards offer more than 6 percent return for shopping with them. Valuable and very convenient insurance coverage is offered by many cards for those renting vehicles.

Some credit cards offer extended warranty protection on purchases of TVs, computers, etc for up to a year. Often this coverage is equal to or more generous in amount and coverage period than what is offered by the manufacture. Furthermore, it usually automatically comes with the purchase, offering added convenience.

There are downsides to credit cards. Interest charged on unpaid credit card debt can be very substantial. Therefore, it is wise to pay off all credit cards in full each month if in any way possible.

Paying off credit card debt in a timely manner has three advantages. First, it encourages financial discipline. Second, a record of prompt payment of credit card debt can help to establish a high credit rating. Lastly, responsible use of a credit card enables consumers to establish a good relationship with their credit card company. In times of trouble, relationships can be helpful.

Though cash is king in most recessions, physical cash is being squeezed out by plastic money for convenience and rewards.

John Browne, a former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at johnbrowne70@yahoo.com.

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