Do We Spend More When We Swipe Plastic?
“You spend 15% more when you use a credit or debit card instead of cash.” Have you ever seen this statistic before? Chances are, you have. But here’s a question for you - have you ever seen the study this statistic comes from?
Lots of people quote this statistic, without citing a source. This isn’t limited to small fries in personal finance blogging - the Wall Street Journal has an article titled As Cash Fades, America Becomes a Plastic Nation which says: “When people pay with plastic, they tend to spend more — often more than they have in the bank,” without offering anything to back up that claim. Dave Ramsey also threw the statistic around in his article The Truth About Credit Card Debt - also without citation.
So where did this statistic come from, and is it even true? I started in on an epic quest to try and find some answers.
My Epic Quest (For Answers!)
I had a lot of trouble tracking down whatever study this may be - at least, any study that I could get access to without paying for. And what good is a study that I can’t link to, and let you guys look at yourself?
I did find a few studies that may have the answers. Such as Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay. This study looks like exactly what I was looking for, but I couldn’t access it without whipping out my own credit card. However, the abstract for the article was very helpful:
In studies involving genuine transactions of potentially high value we show that willingness-to-pay can be increased when customers are instructed to use a credit card rather than cash. The effect may be large (up to 100%) and it appears unlikely that it arises due solely to liquidity constraints.
In other words, this study shows that people do tend to spend more on credit cards, and it is unlikely that this is just because credit cards offer access to more money.
Still, I was not satisfied; I wanted a study that I could actually read through myself. Luckily, I found The Realities of Spending (PDF), a British study that I could actually access and read. This study examines the psychological reasons why a person might spend more using a credit card.
Some things to be gleaned from The Realities of Spending:
~ Adding a $30 expense too a $637 credit card bill makes the $30 expense seem smaller. Grouping transactions on a credit card bill makes the size of individual expenditures seem smaller, which increases spending.
~ Thinking about the cost of a purchase while consuming or using it can lower the pleasure gained from the purchase. Credit cards block this by disassociating the payment from the consumption - in other words, you don’t feel the pain of paying for something while using it if you use your credit card.
~ This works the other way as well: the pain of paying can be cushioned by thinking about the benefits of the purchase. This is why it’s easier to put “things” on our credit cards instead of “experiences” - while we’re paying off our credit card, we can think of all the enjoyment we’re still getting from our iPods, HD TVs, and that cute little robot vacuum cleaner.
~ Credit cards provide the most “decoupling” of payment and transaction out of all the payment methods. In other words, you buy now and pay later, and so act of buying and paying become “decoupled” in your mind. Credit cards do this in a number of ways:
- The increased period of time between when you make the purchase and when you pay the bill.
- Grouping many different transactions into one bill.
- A great diversity in the types of transactions can also reduce coupling - so if you buy gadgets, food, gas, and a range of other things on your card, it will reduce coupling for all those purchases.
- You don’t see actual money leaving your hand, you just write your signature on a piece of paper or on a little screen.
- People generally have a low recall of what they’ve paid for with their credit card. I know I do - I had to comb through my old statements and make a crazy spreadsheet in order to remember all of the purchases I made with my credit card.
So, Do We Spend More, or Not?
I’ll give you my usual answer: absolutely maybe. It really differs from person to person, especially when we’re talking about whether those psychological effects will occur with a debit card, instead of a credit card.
For example, I find that I tend to spend more with cash. Seriously! Here’s why: almost everything “serious” (bills) that I have to pay for comes out of my checking account, usually through online bill pay or a check. Therefore, in my brain, any money I have in cash can’t be used for “serious” things. It’s “fun money!” because it’s in cash form.
Of course, in the back of my mind, I know that I could easily put that cash into my checking account and turn it into “serious money.” But the part of my brain that makes impulse purchases doesn’t really listen to that other part of my brain.
I’m not the only one like this. Trent of The Simple Dollar has a problem with cash burning a hole in his pocket, as well.
So What Now?
You’ve got to figure out what type of person you are. You might already have an idea of whether you spend more on cash or plastic in your head. Think about how it feels when you pay for something with cash, debit card, and credit card.
But you’ll also probably want to track your spending. I’m a big proponent of doing this anyway - so in addition to writing down what you buy and how much you pay for it, jot down what form of payment you used. Once you’ve got enough data, you’ll figure out what kind of person you are. Then you can figure out which form you can best use to curb impulse spending.
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I wonder if debit cards fall somewhere in the middle. Because with debit, I have to know that I’ve got the money in my account right now. On the other hand, checking it online makes it seems a lot more like numbers than cash. Cash scares me.
Comment by Mrs. Micah — October 12, 2007 @ 9:30 am
Mrs. Micah,
I agree that debit cards fall somewhere in the middle. Although the money comes straight out of your checking account, it’s still hard for some people to really think of swiping a debit card as “spending money.” I think that’s why many people have a lot of trouble with overdrafts.
Comment by Stephanie — October 12, 2007 @ 11:45 am
I actually find I spend most with debit. When I use my credit card, I think carefully about when I’ll have to pay it back, also I know my partner will see just how much I spend on a “cut and colour” for example as it’s a joint card. When I use my debit I merrily swipe it in several stores and it’s only when I log on to my account I realise how much I’ve spent. So for me I carry cash, I give myself a weekly limit and if it’s running out I don’t go into stores, or tea shops!
Comment by Looby — October 12, 2007 @ 1:45 pm
If you click the link from a library that subscribes to the journal, you get a full PDF. I find the information suspect- all participants in the study were MBA majors, who may be more alike than disalike. And the methods used were auction like activities- I don’t know that this type of activity can be translated definitively to everyday purchases.
In the end, it’s as you say- it’s important for individuals to realize their own spending habits. I’m of the type that will spend cash when I get it too- so I don’t carry cash.
Comment by Karin Dalziel — October 12, 2007 @ 2:09 pm
Thanks for the effort! It’s nice to see where this frequently quoted statistic comes from.
Comment by SavingDiva — October 12, 2007 @ 3:57 pm
Interesting. To me, it seems that all of the arguments focus around this:
“Credit cards provide the most “decoupling” of payment and transaction out of all the payment methods. In other words, you buy now and pay later, and so act of buying and paying become “decoupled” in your mind. Credit cards do this in a number of ways:”
The problem I have with this statement is that I don’t think about it in that manner. When I “use” a credit card, I am paying for the purchase. I don’t regard paying the actual bill I see on my statement as paying for the purchases. Thus, a “decoupling” doesn’t seem to occur.
“People generally have a low recall of what they’ve paid for with their credit card. I know I do - I had to comb through my old statements and make a crazy spreadsheet in order to remember all of the purchases I made with my credit card.”
This would be very interesting to analyze. As I don’t make many purchases, I assume I’d remember them all (at least I’m never surprised looking at my statements). But for a family person, who makes a large number of purchases, it would be quite interesting to see if a correlation exists between forgetting about a purchase and having paid for it with a credit card.
Of course, it would be interesting to see some of the papers that are cited. I’d like to see some actual data and explanation of the methodology.
Comment by Phillip — October 13, 2007 @ 12:39 pm
Yep, I’m with you on that one. When ever I get cash out of the ATM without a specific purpose, it just disappears. Yeah, there are receipts, but there’s no record of what I’ve spent on. I never know how much I have left, there’s no regulation on it.
With a CC or Debit Card you can always pop online and see what you’ve run up or what you got left, so you know when to curb your spending.
Comment by Baz L — October 13, 2007 @ 1:00 pm
I have issues with this!
I find I don’t use my credit cards if I don’t carry them. So… I put them in the freezer. I always forget about everything in the freezer - chicken, cookies, credit cards…
If I don’t carry cash, I don’t spend it. So I don’t carry cash. However, I notice I’m a lot more careful when I carry cash.
The problem with the debit card is that it is a security thing for me. I’m a single girl and I -hate- the thought of being caught without any money at all in the middle of the city. What if I need a cab or a tow truck? AGH!
So what do people like me do about this? That’s the problem. If I don’t carry it, I don’t spend it, but I have to carry -something-.
Comment by Dory — October 14, 2007 @ 1:14 pm
Hey Dory, how about keeping a large bill with you, say $50, or even $100? I always feel silly buying small things with large bills, and so I kept an emergency $50 in my bag. I even kind of forgot about the money until I really needed it.
I’m pretty sure this doesn’t work for everyone!
Comment by Yinna — October 14, 2007 @ 5:35 pm
Ooohh. That’s a good idea, Yinna! $50 is definitely enough for a cab or a tow if I need it. Thank you!
Comment by Dory — October 14, 2007 @ 6:04 pm
Dory,
Yep, Yinna has a good idea there. I too have an aversion to spending larger bills. If you find you end up spending a large bill anyways (when you shouldn’t), you might try keeping emergency money in a seal envelope in your wallet or purse. The simple fact that you have to bust open an envelope to get to the money might keep you from spending it when you don’t need to, as well!
Comment by Stephanie — October 14, 2007 @ 6:08 pm
One of the things I noticed from most of the responses is that you don’t like to carry cash because you’ll spend it. I don’t have that problem. Then again, i just don’t like to spend money.
Still, it’s beneficial to note that cash shouldn’t just be sitting in your wallet or purse waiting to be spent. It should be used as part of your overall financial plan for a given month. For instance, the only cash we take out each pay period is allocated to specific things, i.e. groceries, eating out, clothing, entertainment, and so on. We only carry the cash we intend to use as a part of that plan. This not only helps us control our spending, it also prevents us from busting our budget. In terms of the debit card, we use it only for gas. And credit cards, well, we don’t have any.
Dory, I don’t see anything wrong with using your debit card for emergencies. We use it in those cases, but we have an emergency fund that’s tied to our checking account to make transfers easily. As far as the recommendations to carry cash, well, then you run into the issue the others brought up, you might spend it on something other than an emergency.
I know for us, using cash has helped us stay on track with our financial goals. But cash isn’t the key component to spending less, it’s budgeting.
Comment by Emma — October 15, 2007 @ 9:55 am
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About 25 years ago, I worked at a major department store in Missouri. We were required to close every sale with the phrase “May I put this on your “store name” charge card”. We were ghost shopped by undercover shoppers and could be fired for not saying that exact phrase. Why? We were explicitly told that people not feel the psychological impact of letting cash out of their hands when they charge and will therefore spend more.
Comment by Judy — February 28, 2008 @ 11:59 am
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Pingback by Getting A Life » The dark side of debit — February 29, 2008 @ 12:04 am
Ha. I spend more when I use credit card AND when I use cash. How is that possible? The best way for me to spend less money is to just not spend ANY. Once I get start… ouch.
More seriously, I actually spend less on a debit card. It is real money. I track later exactly how much I spent and where (so it is accountable). Plus, I have to worry about over draft fees. It adds up to be the “most resistance” method of payment for me.
Comment by Adfecto — February 29, 2008 @ 4:44 pm
I guess to me the question is does using a credit card lead to an increased spending regardless of ones approach to spending.
I can belive that for people who go to the store to “shop” using a credit card might obscur relationship between the item and the cost. So those using credit might spend more.
BUT what about those who are planning their purchases? For example somone who has created a food budget, or a cloths budget, or someone carefully watching their expenses to get out of debt? The reason this is important is that the study you are looking for and me as well is used as a bludgon against those who advocate using credit cards and paying them off each month. But if one on a budget would spend the same when using a credit card or not, then the benifits of the card become valuable.
Comment by Ed — March 15, 2008 @ 6:15 pm
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Your assertion about people not noticing an individual purchase
as much when the costs are grouped is interesting. The first thing I thought of is that new card ad where they say you can instantly get your current balance by texting them so you know how much to spend. I wonder how much their actuaries say that should increase spending on their cards.
Comment by Christopher — June 25, 2008 @ 11:40 am
Did Robert Frank say that “You spend 15% more when you use a credit or debit card instead of cash”
Comment by Aaron — July 18, 2008 @ 11:29 pm
@Aaron: I couldn’t find him saying that specifically, although I did find a bit on NPR with him discussing his opinions on the topic:
http://www.npr.org/templates/story/story.php?storyId=92178034
My point is not necessarily that he’s wrong - on the contrary, what he’s saying does apply to a lot of people - but that some people have a different relationship with paper money and credit cards than the one he’s reflecting.
Comment by Stephanie — July 21, 2008 @ 10:45 pm