Why you spend more when you use a credit card

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You tend to spend more if you use a credit card than you would with cashEver feel like you go on bigger spending binges when you use a credit card than you would have with cash? You’re not the only one.

There’s a lot of research that suggests using a credit card to make purchases usually means that those purchases are bigger than what we’d make with cash. But if the math is the same, why should it matter which method of payment you use?

To begin with, the process of spending via credit card isn’t as transparent as paying with cash. It hurts more to give up cash rather than just swipe a card because you actually have to count out and hand over the cash physically, and be confronted with the sight of your now smaller stack of real bills.

Product benefits vs. focus on cost

But that’s not the only reason that you might find yourself willing to spend more if you use a credit card. A 2011 study, “Do Payment Mechanisms Change the Way Consumers Perceive Products?” published in the Journal of Consumer Research, indicates that using credit cards vs. using cash actually changes the fundamental way you think about your purchase.

According to the study, even for those who pay off their credit card balances each month, using plastic might lead to overspending, because using a credit card encourages the consumer to focus on product benefits rather than cost. On the other hand, when using cash, a consumer is more likely to focus on the cost of the item, rather than all the reasons that they want the product.

Subjects in the study were exposed to products that they might purchase. Information about the features of the products, as well as their costs, were included. Those who were primed to believe that they would use a credit card focused more on the positive details of the products. These details included the actual features, as well as perceptions of a product’s “cool” factor. Few of these respondents could recall many details about the cost of the products, including shipping and warranty information.

On the other hand, those primed to expect to pay cash for the items didn’t care so much about product features. They were more likely to focus on the costs related to getting the item.

Working from cash can help you cut spending

Once you start thinking about the cost of something, rather than rhapsodizing over the awesome benefits and features, there is a good chance that you are less willing to spend as much. Cash forces you to think about the cost of a product, since you’re limited in terms of what you can spend. Once the cash is gone, it’s out of your hands.

When you use a credit card, though, the impact of spending isn’t felt until much, much later (if at all). You are free to focus on the perceived benefits of a purchase, and why you want it. There also isn’t the illusion of scarcity, since you aren’t counting out a limited number of bills. Besides, as long as you can focus on the benefits you are likely to derive from a purchase, it’s easier to see the cost as “worth it.”

What do you think? Do you spend more when you use credit cards? Try this exercise next time you make a few purchases. Did you think more about the cost when you used cash or when you used credit?

(Photo: Flickr user Images of Money)

{ 4 comments, please add your thoughts now! }

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4 Responses to “Why you spend more when you use a credit card”

  1. I never really spent cash ever, so to me it is the same and I think I actually spend less with credit cards. Whenever I have cash it disappears without me thinking about it.

  2. Megan E. says:

    While I like to think this doesn’t ACTUALLY apply to me, I realize that sometimes it does. Two examples:

    1. We had xx.xx left for groceries for the month – I overspent by $0.60, knowing I would just eat it later since it was on a CC – if it was cash, I couldn’t have done it.
    2. I have a gas budget, I went over by $3.93 this month. Again, I COULD have gotten just a bit less, and needed to fill up one day earlier, but I had the cc so I didn’t have to, I’ll just pay for it with the money that came in later, before the due date.

    So while I do pay in full (at least, a balance and interest never factor in), and these amounts are very small, it is easier to justify just a little more with a card than with cash.

  3. JoeTaxpayer says:

    You get praise from me for citing a professional article I’d not seen yet on the topic. Of course it supports your position.

    I’m still a skeptic. I believe behavior in this arena does not fall into a bell curve, but rather, a bimodal distribution. One for the ‘pay in full’ card user and one for the balance carriers.
    For the former group, my group, I have to wonder, do the experiments cited scale up to a real life budget?
    When I grocery shop, and go over budget, it will even out over the next weeks. When I plan just right, I’m actually really over budget. The planning is for the week’s meals, and the blown grocery budget translates into no one asking to get take out or go to a restaurant. Items like gas, it makes little sense to put $20 in the tank and not fill it up. In one direction from my house the gas is 20 cents cheaper. So a 10 gallon top-off saves $2 compared to really needing a fillup in the other direction.

    About a year ago, my wife and a friend found a shop selling custom furniture. They each bought a $3000 dresser (I know.) Jane paid with our card, the friend, with a check. Two months later, the store was out of business. My wife called the card company for a fast credit. The friend was out $3000.

    Many writers offer a bit of advice – budget, and plan. For a new purchase, take time, perhaps a day for every $50 the item cost, and decide if it’s worth it. I think these rules will help avoid the potential of overspending on the cards.

  4. Jim says:

    Well said Miranda, I agree that it is much easier to spend on credit card than cash, that is why the ‘experts’ always say to pay with everything in cash. Its kinda like paying your taxes..If people had to drive to the local tax collector after they get their paycheck and pay cash or write a check for their tax bill they would be a whole lot more conscious about what our govt wastes money on! When it is taken out of their checks they forget about it!

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