“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.
Mrs. Micah says
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.
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.
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!
Karin Dalziel says
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.
Thanks for the effort! It’s nice to see where this frequently quoted statistic comes from.
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.
Baz L says
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.
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-.
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!
Ooohh. That’s a good idea, Yinna! $50 is definitely enough for a cab or a tow if I need it. Thank you!
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 sealed 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!
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.
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.
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.
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.
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.
Did Robert Frank say that “You spend 15% more when you use a credit or debit card instead of cash”
@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:
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.
Christian M. Cepel says
As far as “Dave Ramsey also threw the statistic around in his article The Truth About Credit Card Debt – also without citation.” I think you’ll find that with just a slight bit of research that most everywhere else he cites the 12-18% figure, he cites the study as having been done by “Dunn and Bradstreet”. I expect that simply mailing a request for the citation to his website would have given you the same information with far less time/effort investment than you’ve made trying to find it on your own, and saved you having to write portions an article that sounds very critical of someone who has helped so many become debt free and build wealth. I think he’s cited it so often in his books, audiobooks, and on his show that the quick ‘topic’ article on his website was either overlooked, or just sort of ‘assumed’ to be covered.
@Christian: Thanks for your comment. I hold internet content producers, especially those who have a high number of followers like Dave Ramsey, to a very high standard. A part of that standard is that when it comes to individual webpages in a site (such as the article I used for my example), I expect statistics to always include a citation. Because there are so many “points of entry” to any individual webpage, it needs to be able to stand on its own merits. Which means no matter where else on the whole website or in books or wherever a source may be cited, it also needs to be cited when used on one standalone page. This issue is fairly clear on sites like Wikipedia, where information must always point to a source.
Christian M. Cepel says
@Stephanie: All good observations to a point. I wonder if web publishers are less diligent due to the very nature of the ease of follow-up with questions like this, as opposed to with more static media where you would have to contact the publisher, and likely never get a response. Even if that were true, you are correct in that it is hardly a reason not to be diligent. However, all that said, Wikipedia is seeking to be an encyclopedic source, not a provider of advice and opinion. It is an aggregation of different sources of information by an array of authors who often are in stark disagreement with one another. Those sites seek to eliminate personal bias and opinion and concentrate only on what is factually provable. Sites like Dave’s are single author opinion/advice pieces on a topic. I am able to draw little to no relation between the two types of sites. Even a blog such as this falls into its own category as it may or may not be authored by someone whose professional reputation is at stake. You could be writing articles with no knowledge whatsoever, or you could be as knowledgeable as someone like Dave but be completely unknown and your argument would need to stand on merit alone with no benefit-of-the-doubt assigned based on your reputation, or your copious published works on the precise topic which may be easily referenced. I’m having a hard time thinking of examples where content publishers of many types of media are held to such a standard. When a news personality gives an opinion piece on some political matter or another, they rarely if ever completely expound on all the facts that led them to make their argument. It is enough that their reputation is on the line and that if they make claims that cannot be substantiated when challenged, than their reputation suffers. Blowhards who cannot back up their claims are swept away by their own hand. I’m even having difficulty thinking of magazine articles or newspaper articles written by experts (or even non-experts) where any sort of bibliography or reference section is given at the end (or inline) where each and every study, figure, historical event, quote, etc, is enumerated and united with its source. The exception to this generalization is of course professional and research journals. I like your standard, but I’ve never seen it in the real world and can only shudder at the impracticality if it were required. I also cannot concur with applying standards from one unrelated resource to another where it’s frankly not appropriate to do so. There is simply no relation between an open collaboration of unknown authors and a proven expert in a field with a long track record of either success or failure in providing this type of information. Why do you not expect every radio personality so cite sources for every statement made during a program? Do you honestly expect Dave, each and every time he quotes a statistic to cite the source verbally, or after a while, is he permitted to cite a statistic he’s found from a source he’s verified to his own satisfaction as what he believes to be true?
@Christian: I don’t think experts should have to “give up” their expert status in any way, and I do respect the ability to state opinion freely. But statistics come from somewhere, and usually (including this case) the place they come from is “elsewhere.”
Try to keep in mind that I’m not looking for full-blown MLA or APA (or any other acronym) citations – I would just like to see something like “In a recent Dunn and Bradstreet study, it was found that people spent 15% more when using credit cards…” Most magazines and newspapers are extremely good at working citations into the line of text. Many websites, on the other hand, haven’t mastered that ability.
Christian M. Cepel says
@Stephanie I see. That’s seems more reasonable than I originally thought you meant, and I pretty well agree with the desire. I’ve sometimes wished in conversations that we all had little lights above our head that would light up when certain conditions were true… they would be labeled “Hyperbole”, “Made up stat”, “Heard it from his mentally-challenged brother-in-law”, “Pulled it right out of thin air”, and finally, “Doesn’t want to admit that he doesn’t know the first thing about this topic.” 🙂 A good idea in concept, but I think it might prove rather cumbersome, and some people would find the battery life to fall short of their daily usage requirements.
>>>Do you honestly expect Dave, each and every time he quotes a statistic to cite the source verbally, or after a while<<<
No but when asked he should be able to give the source. Dave CAN’T. I have sent emails to his web stie and they always come back well we don’t really have that report and don’t really know how to get it.
So no while I do not expect an APA or MLA citation either I DO expect that a contact witht the organization making the claim would result in a good citation.
Sorry, one more point. I and several others on the web have been looking for a copy of this D&B study for some time. TO my knowledge no one seems to have been able to find a copy. I am a firm beliver that this is PURE urban legend.
Christian M. Cepel says
@Ed – Why is he responsible to provide that to you. He’s told everyone in numerous locations that he’s referencing that study. Track it down yourself. The author of this very well written post didn’t find it on Dave’s website, but didn’t explore his other materials where it is indeed cited, but she _did_ do the legwork and found another article/study coming to much the same conclusions… what part of the claim are you taking issue with that you believe to be urban legend? The conclusions/claim, or that it’s based on actual research? Does the McDonalds report not back up at least the idea? Does not your own experience? What exactly is you’re taking issue with? I think the author here was most concerned with the lack of documentation on his website, but it seems you take more issue with the claims. Why?
But you can’t track it down. I have tried others have tried. I do not belive this study exist. If it does then it is simple to provide a citation that can be used to obtain the record. But no one can. Even emails to Ramsey result in the response that they do not have it or really know the title but they have seen it referenced in numerous OTHER sources. Thus my assertion that it is URBAN LEGEND.
<<<>> BOTH His other sources do indeed give the source as a study done by D&B but I have found not title of the report, report number, or date of issue. THus there is no way to find it or a copy of it. Again I have an email from his web site were they specificlly state they do not have a copy of the report or know which report it is only that they have seen it referenced elsewhere.
<<>> NO The Mcdonald’s study only looked at average ticket totals. THere are MANY MANY reasons that larger ticket totals corrisponded with credit card usage that do not equal credit cards make you spenld more.
<<> Nope not in the least.
<<>> I take issue with a study being used to espouse a one size fits all approach to ANYTHING, most expecially when you are completly unable to provide the study you are quoting or anything that can be used to locate it.
Christian M. Cepel says
Thank you for helping me understand. I’ve only really been responding because I’ve been baffled by things I’ve seen on the internet. There are people out there that object to the advise given by DR in such loud violent terms and they expound as to why it’s bad advise or ‘wrong’ or whatever…. but what I’m not seeing is a shred of evidence to suggest that the people who have followed that advice and are now happy, secure, debt free, prepared for the future; retirement, college, hard times, etc, perhaps enjoying ‘living like no one else’, and finally giving like no one else, have somehow bought into bad advise and are the worse off for it. Likewise I’ve seen nothing of people proving why his advise is ‘harmful’, just ‘wrong’. Yes, there’s no such thing as a truly one-size-fits-all solution, but the basis of the precepts all seem to be grounded in sense and reason.
I just don’t get it. What is it that people are objecting to? The man? His faith? His economic precepts and advice?
Mostly what I see out there is people thanking Dave profusely, and just a small contingent of nay sayers. What gives? Even the articles that the author of this blog entry found supports very much the idea that there may be significant patterns in the psychology of how people handle their finances and make purchases that can either be guarded against (by a consumer), or exploited (by a marketing exec). I believe the article referenced above was more from the perception of marketing to capitalize on that psychology.
Anyways. I think just for grins _I_ might have a go at finding this study, just because it would be interesting from the standpoint of the psychology surrounding conversations like we are having.
I agree that Dave has helped a lot of people and you certianly will do yourself harm by following his advice. But I do get a sense of holier than thou attitude when I here him speak on this particular subject. I have always (and still) belived that you can use credit cards to your advantage. However, after hearing Dave talk about this issue several times I thought “maybe I am missing something.” Thus my personal quest for information. I like the author of this started a quest for some research and data driven information. I have also found and read several studies on the issue and some have come close to supporting the claim that you spend more when using a credit card. But so far they have all left out one particular class of people, those that have planned their purchases and budgets for them in advance. So what really bothers me is that instead of teaching people how the credit card may result in them over spending and developing ways to combate this issue, a quick and overly simple approach of you are stupid to use credit cards is promoted.
On the other hand, I wish you luck in finding the study, although I do belive that it is a legend. I would be, I hope, the first to admit I was wrong on this point if someone does locate it.
Darn to quick…
I meant to say “you certianly will do yourself NO harm by following his advice.”
Ducking from the flame throwers that don’t read this post first.
Christian M. Cepel says
*grin* I assumed it was a typo. Question though. What significant difference is there between you just said and his advice to use debit cards for exactly the same reason (say, when traveling, or preplanned/budgeted purchases). Am I missing something?
Christian: Interesting question about debit cards.
The first reason that I use credit cards for almost every purchase is rewards. I used to get and use points for travel. Currently I get cash back as I find the travel rewards are not worth as much as they used to be.
Second, I used to travel a lot on buisness and would be reimbursed after filing an expense report by my company. I would regularly run ~8-10K/ month through my credit account, never paid a finance charge as my company reimbursed quickly and I filed on time. (If not the story may be different as always your milage may vary.) Using a credit card allowed me to do this without keeping a cash cushion in the bank to keep from bouncing checks. Some will say that the company was just using my good credit to finance it’s operations, and technically that may be true, but for reason one above I did not mind one bit. I took quite a few “free” trips when I got miles and recieved ~$200 month when I started taking cash back.
The third reason that I use credit is that often I can get several % off at a store for a purchase if I open an account with them. For example next month I plan on purchasing a new HDTV I know what my budget is and which model I plan on purchasing. A certian store nearby offers 10% when you open an account. IF this brings the price to below what I can get the TV for elsewhere then I will take advantage of it and pay the ballance of the first cycle. (of course I read the fine print to be sure there is not a manditory finance charge or early payment penalty, etc.)
Now I have a question for you. What is the difference between useing a credit card for a planned purchase and paying it off without incuring finance charges and your electric bill? The electric company bills you in arrears effetively this is CREDIT. Not only that but you really do not know how much you are putting on this credit account, unless you are really anal abut checking your meter and the rates. Doesn’t that violate Dave’s statement to NEVER use credit?
If you feel that your situation calls for debit cards over credit or cash only please manage your finances that way. Only you know how you behave and why. The reason that I listen to Dave, alot, and others is that I am constiantly trying to make sure that I am not missing something in myself. That is why I really try my best to check out the sources.
The easiest person to delude is yourself, and I try to always keep that in mind.