Does having a credit card make you spend more?

Research says that when you pay by card you tend to spend more than when you shop with cash.

Surprised? But it’s true.

Recently while analyzing cash flow planning for a family, we found that, despite having decent income there is huge mismatch in inflows & outflows. The family then revealed that they shop mostly by credit card and admitted that there is no control on the card bill. This made us to study and understand one’s behavior while paying by card vs cash.

When you pay by card, you don’t realise actually how much and on what you are spending. You don’t dispense the cash so you don’t feel the pain in paying. ‘Direct or immediate displeasure or pain from the act of making a payment’ is defined as pain in paying by Zellermayer.Money literally doesn’t go out of pocket whenever you swipe, so the amount of pain caused is negligent. If you experience less pain of paying, you spend more without noticing it. Hence when you spend by card you shop for more.

Credit card usage off late has become rampant, we start with the convenience of paying but slowly it becomes habit. Credit cycle after cycle, it’s difficult to come out at times of the trap and severely impacts cash flows, which leads to redemption of investments impacting investment planning & goal achievement.

Credit card usage increases frequency & magnitude of spending. – Hrischman (1979)

Plastic money has high salience, meaning you don’t realize you are actually spending. Electronic purchase also allows more scope for impulse buying.

The main disadvantage to credit cards is that they don’t always feel like “real money.” Whipping out a piece of plastic is so easy it doesn’t even feel like you’re spending money. – Capital One web sit

Effect of payment mechanism on spending behavior: The above finding made us think that if we change the payment method, will it impact our spending behavior? There is definite linkage between the way we shop & the way we pay.

When we shop with cash or cheque do we become more diligent?

Cash payments makes consumer more aware of the amount we pay than any other method as one counts notes & coins to tender exact amount. While we write the cheque we repeat amount in words & numerals. This way of payment is more transparent and obvious so pain of paying is more. Pain of paying can diminish the pleasure of purchasing and influences what buyer is willing to spend on a purchase.

Whereas payment by card is less transparent and gives scope for impulse buying. The person who makes series of purchases by card is more likely to make additional extra purchases than person who uses cash or cheque.

What guides our payment behavior? Why do we choose to pay by cash at one occasion & by card at another? We tend to swipe at the supermarket but choose to pay rent by cheque. Paying in cash or card is not the outcome of a conscious choice but is largely habitual. Our habits guides largely the way we choose to pay for something.

Habit per se automates our behavior and is difficult to influence or change. It has been said that it takes 66 days to induce new habit and success ratio depends on willingness to change and commitment towards creating new habit.

Our Take: That said, should we try to be more conscious at every checkout while paying? How should we be using our credit card to avoid trap? Credit card is a tool for liquidity management and convenience and definitely not license to spend.

For a change try to withdraw cash from ATM and spend whenever required. The transparent payment method like cash, cheque are associated with greater pain of paying , lower purchase values and less impulse buying than less transparent method like credit card. Funny part is finding of a study on human payment behavior says that majority of us, 65%-70% likes to carry cash & card both to super market or restaurant but payment is made by habit, so better to go shopping next time only with cash.

Going forward, with the advent of technology- one click purchases & mobile payments, pain of paying is going to reduce further, one need to watch out consciously spending habits to have control on cash flows.


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