Cash vs credit - what should you do?

I know this is off topic [although what stands for "topic" here is rather malleable.] As someone who doesn't use credit cards I found this very interesting and thought I'd share it. The Federal Reserve Bank of Boston has released a Discussion Paper - Who Gains and Who Loses from Credit Card Payments? Theory and Calibrations.

Here's the abstract:

Credit Cards vs Cash NORTH

Merchant fees and reward programs generate an implicit monetary transfer to credit card users from non-card (or “cash”) users because merchants generally do not set differential prices for card users to recoup the costs of fees and rewards. On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year. Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year. We build and calibrate a model of consumer payment choice to compute the effects of merchant fees and card rewards on consumer welfare. Reducing merchant fees and card rewards would likely increase consumer welfare.

What does this mean? Well, in a nutshell, if like me you pay for a good with cash, you are subsidizing all those folks who pay by credit card and who benefit from card rewards programs. This is because the card companies charge merchants 1-2% of the price of a product when a customer uses their credit card. The merchant then raises her prices to compensate for those charges, yet if you pay by cash you don't get to pay less - which would be the true cost of the item; i.e., minus the card company charges. Apparently the credit card companies make the merchants do this. Therefore we cash payers are subsidizing credit card users.

It also gets a bit complicated as [the mysteriously named] Economist blogger M.S. posted:

The Boston Fed paper argues that cash users lose from bundling, while credit-card users win. But an alternative view would be that both lose, since credit-card users lose the opportunity to save money by using cash. For example, on a recent purchase of airline tickets in an emerging-market country, I saved about $200 by paying cash rather than using a credit card. In America, I wouldn't have been able to do that. Using the credit card would have been "free".

I'm sticking to cash. Meanwhile American Express is offering select customers $300 if they pay off and close their credit card accounts. It's not a gift really, they are worried that people will default on their loans.