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Why you spend more when you use a credit card

Ever 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 [3] 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 [4] 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 [5], 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)