“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.