The Easier It Is, the More We Spend

Credit card users spend more

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?

Foremost among the benefits credit cards offer is the protection they afford us.  When I was a kid, it wasn’t that unusual to hear of people finding big bills – or even wads of cash – sitting on the street.  I’m sure that still happens once in awhile, but there’s just not that much cash floating around anymore. If we lose a credit card we can call and disable its use immediately.  Our exposure is minimal.  Likewise, credit card usage facilitates doing long-distance business with people whom we’ve never met.  They may be scamming us, and it still makes sense to be vigilant, but we’re pretty well protected from any kind of significant loss.


One thing credit cards don’t do is protect us from ourselves, which brings me back to the fact that we simply spend more when we use credit cards for our purchases.  In an oft-cited study titled Always Leave Home Without It, researchers Drazen Prelec and Duncan Simester conducted several studies to gauge the willingness-to-pay of individuals using credit cards versus cash.  One example involved telling participants that they could purchase highly desirable, sold-out basketball tickets.  Some could pay with cash, others had to use credit cards.  The credit card users were willing to pay more than double what the cash buyers were.


There are certainly multiple reasons why we are more willing to spend when we use credit cards than we are when we use cash.  The most obvious in my mind, though, is that credit cards are simply easier to use.  If we go to the store with $50 in our pocket and no credit cards, we can’t buy that shiny $150 item.


Mobile payments

Unfortunately for those of us who are concerned about our spending, it will only get easier.  Given our propensity to spend more using credit cards, imagine what it will be like when we can walk through and pay via smartphone, while that phone remains in our pocket!  Mobile payments are coming, and they’re going to be huge.  In fact, according to a recent Crain’s Chicago Business article, eMarketer Inc. estimates that such transactions will jump from $640 million in 2012 to $62.64 billion in 2016.


For the sake of full disclosure, a lot of these high-tech solutions excite me.  In many ways, technology continues to improve our lives.  The payment process will certainly become more efficient, and technology should wring costs out of the process.  Unfortunately, it ignores the impact on consumers from a behavioral finance perspective.  By way of example, it’s pretty clear that the ability to trade anywhere – for stunningly low costs compared to 15 years ago – has only hurt the average consumer.


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?

Technology will march forward.  There’s little question about that.  That doesn’t mean that we have to march with it, however. If you’re a parent of triplets, you’re probably worried about spending at some level, regardless of your net worth or income.  Don’t make your job harder by sabotaging yourself into spending more easily.  If ditching the credit cards and using cash works for you, go for it.  For me, the ideal is to pay recurring bills that are non-discretionary with credit cards.  If you shop online a lot, credit cards are also an obvious choice, although services like PayPal can facilitate a more cash-oriented lifestyle.  When new payment technologies arrive, and they will, don’t be an early adopter.  If it’s feasible, don’t be an adopter at all.  Get your technology fix elsewhere.

About Kevin O'Reilly, CFP®

Kevin O'Reilly, CFP®, is a financial advisor who specializes in working with parents of twins and triplets. Have a financial question? Ask Kevin!


3 Responses to The Easier It Is, the More We Spend

  1. Kevin O'Reilly, CFP® February 14, 2013 at 2:56 pm #

    Thanks, Suzanne. I agree, and in fact I use Amex for most things. In addition to the protection the card provides, I like their spending summary. I try to limit that usage to more non-discretionary kinds of things, but it’s a work-in-progress.

  2. Suzanne February 14, 2013 at 7:43 am #

    Kevin, Very nice article. It’s interesting how credit cards have invaded our lives. I live a virtually cash-less existence. All my clients pay via credit cards. I charge everything on Amex and pay my expenses once per month. You’re right – I do it this way because it’s easy.


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