Research reveals credit cards encourage spending

Conventional wisdom says that people spend more when they use credit than when they use cash. But is it true? In The Money Answer Book, Dave Ramsey writes:

When you pay in cash, you can “feel” the money leaving you. This is not true with credit cards. Flipping a card up on a counter registers nothing emotionally. If you use plastic instead of cash you will spend 12 percent to 18 percent more. This is money you could have saved.

Though he fails to cite his sources, Ramsey's right — most people do spend more when they pay with credit. The September 2008 issue of the Journal of Experimental Psychology: Applied contains research into the effect of payment type on consumer behavior [free 268kb PDF of entire article]. From the press release:

The conclusion that cash discourages spending, and credit or gift cards encourage it, arises from four studies that examined two factors in purchasing behavior: when consumers part with their money (cash versus credit) and the form of payment (cash, cash-like scrip, gift certificate or credit card). The results build on growing evidence that, as the authors [Priya Raghubir and Joydeep Srivastava] wrote, “The more transparent the payment outflow, the greater the aversion to spending, or higher the ‘pain of paying.'” Cash is viewed as the most transparent form of payment.

In July, Ari Shapiro of NPR's Morning Edition talked with Cornell economics professor Robert Frank about why people spend more when using credit instead of cash. Frank echoes Dave Ramsey: “Parting with [cash] is just a more vivid sensation than than abstract act of signing a pledge to pay sometime later in the future.”

During their conversation, Shapiro noted, “When McDonald's started allowing credit card purchases, the average purchase went from $4.50 up to $7.00. That's a huge increase.”

I couldn't find numbers to support Shapiro's claim; however, I did locate an article that quotes an executive from the company that installed McDonald's credit-card processing systems. “When an establishment accepts credit cards, the average ticket size goes up,” he said. “We anticipate a 40 percent increase in the average ticket size for those franchises implementing credit card processing for the first time.”

Just being aware of the tendency to overspend with credit can help you apply the brakes. Here are other methods that work:

  • Don't use your credit card for luxuries. Use it only for things you need, like groceries or gasoline. I follow this rule religiously, and I believe it's one of the reasons I've been able to avoid spending too much.
  • Use your credit card only for big expenses. Kris doesn't use her single credit card for small, spontaneous purchases such as a nephew's birthday gift. Instead, she saves it for big purchases, like a food processor or a dishwasher. She approaches these pre-planned expenses differently, and isn't likely to be lulled into spending too much just because she's using credit.
  • If you're headed to a personal “trouble zone”, leave your credit card at home. Don't take it with you to the mall, for example, if you know you'll be tempted to use it.
  • Don't just look at your total bill — pay attention to the cost of each thing you're buying. When you pay with credit or gift certificates, it's easy to focus on the grand total instead of the cost of individual items.

Not everyone spends more with credit, of course. Some GRS readers report the opposite experience — they are stingier with credit than with cash. Either way, it's in your best interest to know yourself and your spending weaknesses so that you control your expenses rather than being at the mercy of your environment.

More about...Credit, Psychology

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Tony Dobson
Tony Dobson
12 years ago

I have a cashback credit card and consequently I use it for everything purchase I can. However I have also found that tracking every expenditure with it helps me to keep things in check.

I don’t go crazy with it but I manage it very closely. Personally I think it is in the only way to live with a credit card.

Seamus
Seamus
12 years ago

I think it all comes down to the individual. I see how credit cards allow many to spend well beyond their means, but there are also some people if you give them cash in hand, they are just as dangerous. I think the philosophy that should be used is ‘save first’. If you are keeping with that and you go over the top every now and again, and you can afford to pay off the card timely, not a big deal. Of course some will look at it as more money that could have been saved, but if you have… Read more »

Miranda
Miranda
12 years ago

I agree with Tony and Seamus. But you have to be responsible. I, too, track everything. And I keep different rewards cards for different things (online purchases are done with the Upromise card and groceries are done with the miles card, etc.).

I have a friend who actually takes the money out of her checking account, so that she only spends what she has. Then she can easily pay off the entire balance every month.

Bridgette
Bridgette
12 years ago

When I was using a credit card regularly (I am trying to switch to an all cash system), I noticed that I would buy more things than I actually needed. Additionally, I can only remember 3 times in the past 3 years that I have returned something I bought on credit. Once I have paid the bill, I guess I get lazy and just forget to return it. I find stuff around my house all the time that I neither need nor want – most of the time it is some article of clothing.. (that eventually ends up at the… Read more »

Lifeson
Lifeson
12 years ago

I pay for everything with a credit card so I can track expenses, get cash back, and avoid using ATMs. I do, of course, pay it off in full every month. I agree that I probably do spend more this way than if I were using cash, but it’s one of the mental games I play to actually get myself to spend money. Something like 45% of my income is being snowballed towards my car and student loans, so I force myself to avoid some of the “pain of paying” because I’ve made myself oversensitive to it. Otherwise I wind… Read more »

ekrabs
ekrabs
12 years ago

I also agree with the conclusion that people in general are more likely to buy more with plastic than cash.

I’m also glad that you’ve added the caveat that not all people are like that. I think it’s a matter of personal finance skill. If you can maintain and track your budget correctly, then it won’t matter what payment method you use.

Kayla
Kayla
12 years ago

I actually spend more frivolously when I have cash. I almost always use my debit or credit card because Bank of America has a great program that allows me to track and categorize those expenses. When I have cash, I tend to spend it on little treats that I wouldn’t normally get, like sodas or candy. I have an aversion to spending just a dollar or two on credit, so I usually just skip out on small treats if I don’t have cash.

Richard
Richard
12 years ago

If my wife has cash, she’ll buy snacks and lunch at school. She knows she’s supposed to pack a lunch (as per our plan, I’m not her boss), but when there’s cash in her wallet, she figures “hey, this isn’t included in the balance online, it’s extra!”

I think I’m the same way, but it’s hard to tell for sure 🙂

Ryan McLean
Ryan McLean
12 years ago

Well this is just proving the obvious. We all knew that. It is nice to know that it is 100% true, but no one really needed to spend money researching it to discover this.
I only got a credit card 2 days ago and it has already encouraged my spending habits

jtimberman
jtimberman
12 years ago

Heh. I’ve commented on this site before about this exact topic, citing Ramsey. While doesn’t cite a source in *that* book (The Money Answer Book), he does say in Financial Peace University and his Live Events that the source is a study done by Dun and Bradstreet. As near as I can tell, that study requires paying them some kind of fee to obtain. I scoured their site with very creative Google searches and couldn’t find it, so I assume it is locked away somewhere only for people who give them the $.

KC
KC
12 years ago

Over the years I have curbed my spending significantly. I thought I’d taught myself to be more objective in my spending and I really have. But last year we had some problem with the 2 credit cards we carry and we couldn’t use them for a few days. No problem – go to the bank and take out a few hundred dollars cash to hold us over. First thing I do is head to the grocery store as we did need a few things. But I only took $60 with me thinking I usually spend $40-$50 so I’d be fine.… Read more »

Brigid
Brigid
12 years ago

One of the reasons I tend to spend more with a credit card is that I feel like a weenie when I charge something under $5. If I get a latte, I’ll something else to bring up the total price. I’m not sure where I get that complex from. I guess I feel that everyone should have at least $5 in their pockets. It kind of makes me feel like I’m back in high school and I’m putting a $1 of gas in my car because that’s all I have. Of course you could actually get a gallon of gas… Read more »

Paige
Paige
12 years ago

I am with Tony, using credit card for everything and then tracking it closely and paying it all off in time.

In a typical month I spend upwards of 3k on credit cards (that includes rental payment) and there are hardly any months when I pay any CC interest at all. Just keep paying it off.

My Daily Dollars
My Daily Dollars
12 years ago

The big difference for me is how I account for the money I’m spending. When I used to carry a balance on my credit cards, it was too easy to just say, “Oh, I’ll pay for that some day.” That’s what led to me paying more, not just the act of pulling out the plastic. It’s the feeling that credit is more fluid, and I don’t have to account for every dollar because the bill doesn’t come due at the end of the month. I still use credit cards, but now, I have to pay the balance in full each… Read more »

J.D.
J.D.
12 years ago

I should explain how this entry came about. Yesterday I made a trip to the grocery store. I was shocked to find that my total came to $45 (I wasn’t buying very much). I always pay for my groceries with the credit card in order to get the 1% cash back. But I began to wonder: was I buying more because I knew that I was going to pay with credit? I didn’t feel like I was doing so. (In fact, I always forget that I’m going to use credit until the very last moment.) While telling Kris about this… Read more »

kdub
kdub
12 years ago

Now that I’ve paid off my credit card debt, I’m still using my card for bigger purchases because I want the reward points, but I pay off the card as soon as I see the purchase hit my online statement. I think the fact that the money is coming out of my bank account almost immediately after a purchase with my credit card helps me to realize that I can’t spend more than I can afford.

Rob
Rob
12 years ago

While I’ve gotten a LOT better with my spending, I still often carry a balance on my credit card. One way I’ve completely curbed overspending is that every time I think about a purchase price, I automatically assume that I’m going to have to pay the 6% finance charge. So if I’m thinking about going out and spending $100 at the grocery store, I factor in another $6. I know it seems like a paltry, insubstantial amount, but I found in my recent mode of tracking every dollar spent, I’m put off by that. Why should I be willing to… Read more »

Annie Jones
Annie Jones
12 years ago

I’m one of those people for whom this doesn’t hold true. When I use a credit card, I feel nervous and guilty about it, so I only use one when I absolutely must, and I charge as little to it as possible. I use a debit card for nearly everything and track my spending in detail. I like having the paper receipt in hand AND the ability to track it online. I feel as if I keep a tighter rein on my spending when I use it. I rarely carry cash. When I do, it’s far too easy for me… Read more »

Mr. ToughMoneyLove
Mr. ToughMoneyLove
12 years ago

Great post J.D. I can see from many of the comments that folks are mis-understanding the point of your post and the research. Even if you are careful with your plastic and pay off every month, the emotional part of your brain is allowing you to spend a little more with the plastic. Read “Your Money and Your Brain” by Jason Zweig and you will understand. You can’t help yourself.

Kristina
Kristina
12 years ago

Actually, Dave does gives those citations to those quotes, at least when he discusses the issue on his radio show. He regularly refers to studies done by Dunn and Bradstreet (not sure if I’m spelling that right). Additionally, there are tons of studies that marketing companies, credit card companies, and other companies (like McDonalds) have done to prove this point and to help them sell credit cards.

michele
michele
12 years ago

I volunteer as a treasurer for a charity. Every year we do a charity auction. About 5 years ago we started accepting Visa/Mc as a payment option. That year, our auction bidding was dramatically higher than in past years (about 30% more) of our donors, 45-50% of them pay with credit card, and have made statements to the effect that they were glad that we started taking them because they didn’t bring enough cash. Those comments have continued in the years after and I do believe that in that situation, people who were using credit spent more because of it.

Lilly R.
Lilly R.
12 years ago

I agree. I purchase everything on my credit card for two reasons: 1. I am terrified of having my bank account number stolen and having fraud agents my checking account 2. By using my credit card I get a to track all of my monthly transactions, and at the end of the year,I get a beautiful statement detailing what I spent for the entire year. (And yes, it is shocking!) As for spending more than I usually would on the card, I do not believe I do this. I always try and stay within my means, and I always want… Read more »

Simple Sapien
Simple Sapien
12 years ago

I find my spending to go the opposite direction. When I end up with some cash in my pocket, which is rare, I seem to spend it within the next few days. One: Because it is in my pocket and I am reminded of it constantly. Two: Because it seems silly to add on a few bucks to my deposit at the bank. There is no logic in that I realize… and it will change! Whenever I swipe my card I picture my Wells Fargo account online going down in numbers visually, that helps me cool it. – Jack Rugile… Read more »

Steve
Steve
12 years ago

I get a kick out of the whole McDonalds transaction increase as a way to say that people spend more with credit cards. Fact is, there isn’t enough evidence. There are a number of factors that come into play that simply cannot be tracked, such as: 1. How many transactions are simply lost without taking credit cards? I know that I will not shop at any business that is cash only, so my transaction becomes a zero. 2. Average transactions on credit cards are also affected by the number of people on the transaction. For example, if I go out… Read more »

TosaJen
TosaJen
12 years ago

Well, if I didn’t have a credit card, I wouldn’t buy so much of my stuff on sale online. On the happy side, I really only buy things I’ve been planning to, and it keeps me out of stores, where items jump off the shelves into my cart (especially at Target, Trader Joes, and Costco). I tend to use a cc when I’m stocking up — I’ll charge the monthly Trader Joe’s run but not the weekly local mega-grocery store run. There’s something in my brain that goes against using credit for basic groceries, but thinks it’s OK for a… Read more »

J.D.
J.D.
12 years ago

@Steve Right. Exactly. While I want to believe these numbers and stats, I’m always reluctant to so without some research behind them. That’s why I haven’t written anything about Dave Ramsey’s claim before now — I’ve never seen any verification. But the journal article I mention not only has studies of its own, but also does a good job of reviewing the previous literature on the subject. Apparently researchers do not doubt that, on the whole, people spend more with credit than with cash. As Adam will surely come along to say, correlation does not imply causality. There may be… Read more »

EscapeVelocity
EscapeVelocity
12 years ago

Well, if you’re using cash, you CAN’T spend more than you have on you. If you come up short at the register, you’re going to have to put something back, which is embarrassing. If you’re using a credit card, you effectively have $15,000 or whatever your limit is on you at all times, so you can put that extra bottle of wine in the basket with no fear of humiliation. Unless you’re close to your limit, I suppose, but I’ve never been.

plonkee
plonkee
12 years ago

I think it’s interesting. I’m honestly not sure which category I really fall into.

If I have money in my wallet I spend it like it’s going out of fashion. On the other hand, when I had my door replaced recently I paid in cash, and handing over a huge amount all at once was really unpleasant.

It’s probably better for me to pay by card for small purchases, and cash for large ones – probably because that’s the opposite to how you’re supposed to do it.

Richie
Richie
12 years ago

I know that I spend more money when I use a credit card. Switching to a primarily cash-based system for my daily spending about 5 months ago has saved me quite a bit of money in overdraft fees. I kept going over with my debit card because my mental calculations of my account balance wasn’t working very well.

Jay
Jay
12 years ago

I am going to agree with Richard in post #12. I too make it a point to never carry cash because of the random small purchases I make when I have it. I have to pass 3 vending machines to get to my desk and the company cafeteria. I have never kept large amounts of cash on hand, but if 20 dollars happens to sneak into my wallet from a birthday card or a friend paying me back, chances are that I will spend it within a week or so. As mentioned in the article I had a hard time… Read more »

Chris H.
Chris H.
12 years ago

I’m not sure of the demographic that reads the site, but I always spend pretty much any cash I have on me because of trips to the bar. Even when I use my card I don’t run up nearly the tab I do when I have cash. Someone mentioned it before; once the cash is drawn from the ATM it has already been counted against my budget, so I’m more likely to spend this amount freely.

Al
Al
12 years ago

I use credit almost exclusively, and generally pay off every card every month, but am careful buy only what I need or what I truly want. I think the key is not to buy compulsively, but to weigh each purchase seriously. If you see an item and wait until you are ready to leave the store to put it in your cart, I find that well over 50% of the time it’s something I did not really want bad enough to go back and get it. There are some things I’ve been “looking for” and when I see those, I… Read more »

Kelly
Kelly
12 years ago

I’ve certainly found this to be true for me. Over the past month, my husband and I haven’t used our normal CC because we keep getting fraud alerts and the account is frozen. Normally my husband will rack up at least 2 and as many as 10 or more Amazon charges a month. He hasn’t bought anything from them the past month and it’s been nice! I don’t want to use our debit card online, but part of me doesn’t want to get another CC if it keeps the spending down!

Christina
Christina
12 years ago

I once read about a study (I believe it was in Robert Cialdini’s book, “Influence”) that was conducted on a group of students who were supposed to be buying items from a catalog. The independent variable was the method of payment they were assigned. Of course, those who were paying with credit spent more than those paying with cash. However, the interesting thing was that some of these students did the exercise in rooms decorated with credit card logos, and some did them in plain rooms. The students (even the cash students) spent more when exposed to the logos. The… Read more »

Kristen a.k.a. The Frugal Girl
Kristen a.k.a. The Frugal Girl
12 years ago

My husband is like Kayla and others…he is WAY worse with cash than with a credit card. I’m naturally frugal, so I spend the same amount either way, and so I go for the credit card with the cashback.

Kristina
Kristina
12 years ago

Chris H., I’m with you on this one. Once the cash is out of my checking acount, it has already been spent according to my budget. So, I spend it like it is water.

Debit cards and credit card provide me with convenient online statements that I can access online as frequently as I want to. So, if I lose a receipt or forget to write a purchase in my register, there is a handy reminder online. Plus, I get cash back with my credit card.

Anne
Anne
12 years ago

I’m one of those people who spends more with a credit card. Figured it out the hard way too 🙂 But I do think I could curtail it if I did what Tony in #1 suggests. I switched to cash in protest of the awful interchange fees the card companies are charging. I don’t feel all that guilty using them at chains but I’ve started going out of my way not to use them at local businesses or small websites.

I like having my stingy self back though. For me cash is the ultimate defeater of silly impulse purchases.

No Debt Plan
No Debt Plan
12 years ago

Cash, credit, debit… payment form doesn’t matter to me. (Note: we use credit for everything). What matters is if you are sticking within your budget. The problem I have with cash only spending include: risk (someone steal’s your wallet, you’re SOL), inconvenience (obviously a key draw to credit cards). Let’s setup an example. Our budget for food is $55 per week. I’m at the grocery store with $55 and it’s the first week of the month. The rest of my budgeted money is at home in an envelope. I have my grocery list, full of frugal recipes ready to cook.… Read more »

Kristina
Kristina
12 years ago

I forgot to add that when I pay with a credit card there is always this little voice in the back of my head saying “Be careful! You have to pay this back at the end of the month. Put that cute pair of shoes back. It might put you over what you can afford to pay back!” On the other hand, when I have cash I know exactly how much I have to spend. So, buying that cute new pair of shoes doesn’t make me feel as nervous as buying with the credit card does. As a result, I… Read more »

plonkee
plonkee
12 years ago

@Chris:
I’m another person that can spend a lot in a bar, if it’s any consolation. And for some reason, I never want to pay with change when I’m getting drinks – I end up with loads and loads of rubbish-y coins.

I would hasten to add that it’s not all for me, but I’m in the UK and we do rounds so everyone else buys for me as much as I do for them. British people drink a lot of alcohol.

Richard
Richard
12 years ago

It appears to me that cash or credit causing more spending is tied to how the individual thinks about money.

If you’re a person who thinks of money as green pieces of paper, then you might spend more with a credit card.

If you’re a person who thinks of money as a number on a web page or spreadsheet, then you might spend more with cash.

Someone here has a habit of saying “do what works for you”, which is probably good advice once again. 😉

Martacus
Martacus
12 years ago

I’m not sure whether I tend to spend more when I use cash or credit. I do know that I tend not to track cash transactions, however, so I avoid carrying cash. Day-to-day living expenses (groceries, medicine, hygiene, etc.) are paid with my sole credit card, while I pay for bills and large purchases (say, if I need to buy a new window) by check. I need a paper trail, otherwise the money might as well simply flow directly from my bank account to merchants.

Someone
Someone
12 years ago

@My Daily Dollars Says: “The big difference for me is how I account for the money I’m spending.” Bingo. The credit card is just an abstracted promise, cash is just almost-worthless scraps of paper and bits of metal. Seeing using either one as giving up something of value is purely a state of mind. I suspect there’s a great bit of individuality to whether the credit card feels more like “spending money” or whether the handing over the bits of paper and scrap metal feels more like “spending money”– and that like @My Daily Dollars says, which is which is… Read more »

John C. Kirk
John C. Kirk
12 years ago

I think one issue here is that companies may have to pay a handling fee if they accept plastic cards (debit or credit). I know that some shops in the UK have a minimum price before they let you pay with plastic (e.g. £5); others don’t, but I’d feel bad about buying a can of Coke that way. So, there are two implications: a) The sample data is biased: if you exclude small purchases (e.g. people who just buy fries at McDonalds), that will automatically make the average rise, even if the customers’ spending habits are identical. b) This may… Read more »

Lisa
Lisa
12 years ago

Hi JD, In your above comment, you say that “correlation does not equal causation”. However, you should emphasize that the study you link to is a series of EXPERIMENTs, which means that people were randomly assigned to conditions and you can, in fact, make a causal statement about variables IN the STUDY. The study clearly says that the research participants were willing to pay more when paying with a non-cash method, EXCEPT when the salience of the money in the transaction was made clear. For example, in Experiment 2, participants were asked to estimate how much someone should spend either… Read more »

GHolmes
GHolmes
12 years ago

Good discussion and glad that you posted the study JD. Wish that one of us would calculate the true economic cost for using the credit card. Nothing is free so how is it that banks can offer loan with no fees?

elena
elena
12 years ago

I work for a large apparel co. and their studies show that customers spend 43% more when using their store card compared to non store card transactions.

Krystal
Krystal
12 years ago

Hi JD, Great post! I know I spend more with credit cards, but my partner does not. I think any studies or research just make us look inward about our own spending habits, and keep track of our budgets and compare spending. I love articles like this because it reminds me that I am the one in control of my own habits, regardless of these habits are parallel with studies or not! One question for us who use the credit cards for the rewards and/or money back… When we say we will pay it off the next day to generate… Read more »

RJ
RJ
12 years ago

I definitely use my credit card sparingly, so I rely mostly on cash for my purchases. This works well for me because I’m wired to try to keep as much cash in my wallet as possible; it’s sort of like a game I’ve developed over time. By the time Thursday or Friday comes, I’ll often have as much money in my wallet as I started out the week with, and that satisfaction allows me to spend more flexibly (though still responsibly) at the end of the week.

Double
Double
12 years ago

I would guess that more people would be prone to spend more if they use a credit card than cash as you don’t physically lose anything out of your pocket with a credit card but spending cash will make your pockets lighter and sometimes seem to burn a hole in your pockets.

Personally, I like having a no fee credit card with points program as I put on all my purchases that I can on it to get points then am only bothered to make one payment once a month from my bank account.

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