The research is pretty unambiguous – the average consumer spends more when using a credit card than when paying cash. This probably makes sense to most of us on an intuitive level, but it may seem like the gap would be small. Furthermore, credit cards have some definite benefits over our traditional transaction mechanism, cash.
Is it a good idea to abandon credit cards?
Utility and payment method
A recent video blog post by noted Duke professor Dan Ariely called The Pain of Paying highlights this phenomenon in reverse. Ariely explains that the pain of paying adds a “moral tax” to consumption in the form of guilt, and that the timing and method of payment affects our enjoyment. Not surprisingly, the preferred method for paying if you want to increase the pain is to use cash. If you want to decrease the pain, you should use credit cards. Ariely also cites the use of prepayments as a way to decrease pain: “prepayment can focus our attention on the enjoyment of an experience”. In other words, put the pain of paying out of your mind and just enjoy what you’re doing. This makes a ton of sense to me, and is one reason I like the idea of all-inclusive trips. However, doing this for all of your consumption could be devastating to your financial health.
I believe the flipside of the prepayment notion is more universally helpful. It goes to a point I often make to clients of mine, which is to try to focus on the utility of a purchase prior to making it. That’s kind of an abstract concept, though, which makes it tough to implement. Changing your payment method to make it a little harder to pay for something is an easier way to add a bit of mental accountability.
What will you with this knowledge?