The Fascinating Science Behind Credit Card Spending
Learn about the science behind how you use your credit card, see how a simple swipe makes spending your hard-earned cash that much easier—maybe even too easy—and understand why we seem to freely use plastic with less regret than when we spend paper money.
When you shop with plastic, it's so easy to swipe your card, get what you want, and forget about it!
Maybe too easy …
I cannot tell you how many trips to the big box stores we make as a family that always end with at least $100 spent.
We don't see credit the same way we see cash.
When money is electronic, our bank accounts can drain much quicker than if we paid everything with physical hard currency.
The ease of transferring funds to a merchant with a simple swipe or tap can be a double-edged sword.
Using a credit card can cause us to spend cash we don't have, creating spending habits that keep us from a more financially stable future.
Irresponsible credit card use can lead to the lack of savings, uncontrollable debt, and the loss of economic freedom—the ultimate financial goal that everyone should be striving toward.
A Federal Reserve Payments study showed that non-cash payments increase at an average of 5.3% every year.
Also according to the Federal Reserve, the amount of debt owed by houses that carry a balance has risen by 10% from 2013 to 2016!
Which means as more and more people start favoring the use of cashless electronic payments, the amount of debt they owe is steadily going up as well!
But if we can figure out how to live and spend responsibly in a world where electronic spending has slowly become the norm, we can save more money for the future and live with less debt.
By learning the psychology behind our behavior with credit card usage, we can control our spending habits more effectively.
Even if you've run into credit card trouble in the past, understanding the science of the way we spend might just be what you need for a better financial future in a world dominated by virtual payments and electronic transactions.
It's time to learn some fascinating findings about human psychology and see how you can use this knowledge to start spending wisely!
The Psychology of Spending
We're all humans, and thus, we're all creatures of habit.
Habits have a big effect on how we spend money, and what we spend it on.
Knowing the science and psychology behind what makes us spend money the way we do can help us control those habits that are keeping us from a better financial future.
We tend to spend more when we use credit cards
It seems like common sense to anyone who has ever made the jump from paper cash to plastic cards, but when we swipe, we tend to spend more.
An MIT study proves it. There is now scientific evidence to suggest that credit cards can make us spend more.
In the study, participants were offered the opportunity to buy sought-after tickets to a basketball game.
Some participants were only allowed to use cash or debit cards to make the purchase, while others were only allowed credit.
What the study found is that people were willing to pay almost twice as much when using credit as they would if restricted to using only cash.
Even for smaller-ticket items like a meal at McDonald's, people that pay credit tend to spend $7, while people that pay cash spend just $4.50.
Even seeing a card company's logo will cause customers to spend more. Research from Purdue University shows that customers tend to spend more at restaurants when they see symbols associated with credit cards.
It's possible that in the age of electronic money, we have become conditioned to react this way when certain stimuli appear.
Just like how we start drooling when we see food, when we see the symbol for Visa or Mastercard, we end up buying fancier and pricier dishes and leaving bigger tips.
Electronic sometimes simply costs more. Studies by the National Bureau of Economic Research have shown that the growth of digital payment for things like highway tolls go hand-in-hand with an increase in the toll itself.
It seems like some people found out how much we tend to spend when using cards before we did, and so at places like tolls, prices have risen along with the times!
We have trouble valuing electronic cash the same way we value paper money
Even though electronic cash has been around for the better part of half a century, we still have an easier time appreciating the value of a dollar when that dollar is paper.
You only ever have so much cash. Credit cards carry whatever their credit limit is, and that can be paid back later with whatever is in your bank account.
Cash, on the other hand, is limited to whatever you're carrying on you at the time.
If you have $10,000 in your bank account, spending $10 on lunch—swiped on your card—doesn't seem like much.
Since you're probably not crazy enough to carry all your funds as cash in your wallet, on any given day, you probably only have $100 worth of cash on you.
In this case, paying in cash for a $10 lunch means you just spent 1/10th of the money you currently have.
This might make you want to consider ordering a $5 meal instead.
Cash is tangible and has its value stamped right on it. When you swipe, a small amount is simply subtracted from a larger amount.
It's an electronic event you really don't get to see unless you examine your credit card account details after buying.
Cash, on the other hand, is tactile, tangible, and has its dollar value printed on it, reminding you of the exact value it holds.
Think about what happens when you only have a $50 bill and need to buy something that's $10.
You need to break that $50, and you see the value of a larger bill broken into smaller values when you get your change from the cashier.
The entire process seems much more vivid than if the purchase is simply done with a card swipe, and that's because it's much easier for us to appreciate how expensive things are when we're paying with cold hard cash!
Spending cash makes you appreciate what you buy more. We all know it can be painful to part with cash, but a University of Toronto study says this also makes us grow more attached to the stuff that we buy.
In the study, participants were offered a chance to buy limited edition mugs.
The researchers then attempted to purchase the mugs back.
What was found is that those who purchased their mug using cash ask for a higher selling price than those who paid for it in credit when it came time to sell the mugs back—they valued the item purchased more.
It makes sense.
Cash comes with a clear value attached to it.
When we spend that cash, the value is transferred over to the thing we purchased.
Just like how it is easier to value cash than credit, we also tend to value things purchased with cash as well.
The convenience of cards makes us spend more
There's no denying paying with a card is convenient, and it gets more and more convenient every day.
And while convenience is always nice, too much of a good thing can be costly as well.
I cannot tell you the last time I made a purchase over $100 with cash, because I honestly never carry cash!
Cash is harder to spend than credit. Imagine you're visiting New York, and you walk into a store one morning to buy a simple souvenir of your trip.
You pull out a crisp new $100 bill, only for the cashier to inform you that they can't break a hundred because they just opened shop!
With plastic, unless the store has a minimum for charge cards, the only hassle involved was months or years back when you first signed up for the card.
A lot can go wrong with paper bills, but the convenience of credit cards comes with a price.
If it's easier to spend money, you'll spend more of it. Economists and marketing experts often talk about the term frictionless spending.
The idea is that the easier it is to pay, the more you'll spend.
Just like skis down a mountain or skates on ice, the less the friction, the easier the movement.
But sometimes, the friction is so low that the speed is too fast and it can be hard to maintain control.
Frictionless spending can cause us to spend a lot more and a lot quicker compared to the traditional way of paying with cash.
That's all thanks to the highly optimized, hassle-free checkout processes of modern commerce, and the ease and convenience of making purchases with a card or an app.
Rewards cards can make using plastic seem like a better deal than it really is
There's an ever-growing variety of credit cards to choose from out there—and while choosing the best card is important, sometimes incentives come with risks.
Cards with rewards can cause you to spend more than you might usually. A card that's giving you points toward flights with every purchase, for example, might get you swiping plastic more often.
Makes sense, you're gonna be spending money anyway, and flights aren't cheap!
The problem is that those rewards, like that tempting sign-up bonus, can end up costing us more than we can save.
If we're getting cash back on purchases at bars and restaurants, we might wanna take advantage of that more often.
But bars and restaurants are a little different from groceries and fuel—they are pricier and they aren't a necessity.
So if saving is your goal, rewards cards may end up steering you in the wrong direction.
And that's not to mention that most of these cards come with annual fees!
It's possible to be responsible with a rewards card, and there are some helpful cards out there that can save you money if you're responsible with credit!
But if you're the type to carry a balance or max out your card, playing the points-game might end up hurting you in the long run.
Better Credit Card Usage
Electronic payment has become the norm in today's society, with more than half of all purchases being made by card or app.
There's no changing the course of history: between cash and card there's a clear victor—but with a better understanding of how we use our credit cards, what can we do to make sure we use them responsibly?
Making rules for how you use a credit card will change how you behave
While it might seem like common sense, laying down rules for how you use your card can help you change how you use it.
And the earlier you do this, the less likely it will be for you to break those rules in the long run!
Leaving home without your credit card may curb impulse purchases. This one is easy to understand.
You're walking to work and pass by your favorite coffee shop.
You figure one drink won't make or break your bank account.
Then you remember your card is still in your dresser back home—and strangely enough, shelling out $5 in cash for a drink feels way too much all of a sudden.
So, you walk by and forget all about your impulse.
Leaving your card at home is like leaving your keys behind when you go out for drinks—you don't even give yourself a chance to make a mistake.
Besides, if you're the type of person that carries a balance, paying with cash is cheaper!
Cards with low-interest rates can be hard to find, while the bills in your wallet don't carry any interest rate to begin with!
So maybe for you it makes more sense to avoid the credit card interest rates altogether because as they say—no risk, no danger.
Use your card only for specific things. If you use your card for every little purchase, you're going to be making a lot more of those little purchases, including the unnecessary ones—and they do add up to quite a total!
Instead, what you can do is to reserve your card for buying necessities you already have budgeted out, like groceries, utilities, or fuel.
If you keep this rule cemented in your head, you'll never come to associate your card with your impulse purchases, and since impulse buys are harder to make with cold, hard cash, they'll occur less frequently!
Make sure the rewards match the way you use your card. Rewards are usually geared toward certain types of purchases, so you need to make the one you have makes sense for you.
A safe bet is a card that gives you cash back whenever you buy groceries.
You are always going to need to eat, and making food at home is almost always cheaper than eating out.
Cash back cards can be an excellent way to make grocery shopping a bit cheaper, and if your card is only giving rewards on specific types of purchases, you might be less likely to swipe away on impulse buys and shopping sprees.
Budgeting and keeping a spending log will help you appreciate the value of your money
It's no secret that budgeting is the key to a better economic future, but if we're going to talk about psychology, how does budgeting affect our mindset and behavior?
Budgeting lets you avoid impulse buys. As we've pointed out above, if you know what you're going to spend that week, you're less likely to waste money too quickly.
Spending logs will remind you that electronic money is still money. When you really start putting your plastic to work, it can be hard to keep track of all those purchases.
Credit allows you to pay later, so you tend to forget just how much you already spent when you're shopping.
At the end of the month, the bill can come as an unfortunate surprise that you might not have been ready for.
If you keep a diary or a simple log of every purchase you make, you'll start to see where, when, and how wisely you're spending money.
Just like the researchers we talked about before, you'll start to take into account the psychology behind your own behavior.
Try it just for a month or two and categorize your purchases.
This way, you'll start to see just how much money you are you spending, and how your ever-handy credit card might be to blame.
Don't confuse spending with happiness—shopping when you're feeling down is costly
For centuries humankind has gone back and forth on the issue, "Can money buy you happiness?"
While many might argue it can if you know where to shop, in the long run for most of us, impulse buys can lead to buyer's remorse.
There's no doubt that financial stability is a virtue, but how do our emotions factor into the picture?
Shopping while sad can cause you to spend more. A study performed at Carnegie Mellon University found scientific evidence that suggests our mood and shopping habits are closely linked.
When feeling down, some participants paid more than three times more than the participants who weren't sad.
Just like shopping hungry, when you're feeling down, it's best to find cheaper and maybe longer-lasting sources of joy.
Shopping can give you a temporary mood boost. One of the reasons sad people tend to spend more is because spending money, whether it's cash or credit, can give you a temporary mood boost.
But boosts like these don't end up lasting very long, and like eating dessert instead of dinner, it can leave us feeling empty as quickly as it had us feeling full.
The best way to avoid this is keeping yourself busy, having pleasures in life that are less tied to spending, and above all else, not shopping when sad!
Now that you know the science behind spending, it's time to start saving
Credit cards are useful—if they weren't, they wouldn't have become so popular.
But with a credit card comes purchasing power, and having that power requires responsibility.
Looking at human behavior can help us understand why we are more likely to max out our card than empty our wallets of cash during a shopping spree.
Keeping this in mind will save you more money over time.
It might be a good time to start leaving your card at home or only using it to make budgeted purchases.
Otherwise, you'll be letting your all-too-human tendencies get the better of you.
Since 1998, I've been teaching consumers the ins and outs of a wide range of financial topics, while providing the advice and solutions they need to effectively manage their financial woes.
It's a personal goal of mine to share what I learn, and one thing I learned while writing this post is that good personal finance starts with developing control.
That comes from knowing more about yourself—your moods, your mindset, and your spending patterns.
Does any of the science here resonate with you personally?
Have you struggled with poor spending behavior in the past?
Got any good tips on how to curb impulse shopping?
Let us know in the comments below!