Do Credit Cards Trick You Into Spending More?

When you are paying for something, have you ever taken out your credit or debit card to swipe without a second thought? 

No looking at the bill, no consideration to how much each item costs; just an instinctive reach for your plastic and swipe. This is not abnormal behaviour. But does this mean that cards are making you spend more? Research seems to suggest so.

When you really think about it, it does make sense to an extent. Cash is a tangible item that you can physically touch. When you spend cash on purchases, you lose that valuable piece of paper, leaving your wallet emptier. 

You see and feel this difference in your wallet and have time to process it. However, with the increasing popularity of credit cards, debit cards, and eWallets, money transactions have become a lot less transparent.

The psychology behind credit card spending

Have your parents ever told you to be careful about using a credit card because it is a quick way to get into debt? 

Well, they may have a point. When using credit cards, it is quite easy to convince yourself that you are not really spending “real money”. Technically, this is correct. 

Credit cards are more like loans than anything. When you make a purchase with a credit card, you are not really spending money, you are borrowing it. 

You know that you will have to pay back this money eventually, but having your payments pushed back to a later date can make it easier to detach yourself from the guilt of spending. Unless you pay back the purchase immediately, you won’t feel the sting of the purchase till the end of the month.

What do scientific studies on credit card spending show?

A number of studies show us that this really is the case when it comes to spending. The classic Drazen Prelec & Duncan Simester credit card study is one such example. In it, a group of randomly selected participants were offered the opportunity to buy some highly sought after and valuable tickets to a professional basketball game.

Half of the participants were told that they could only pay for the tickets in cash, while the other half were told that they could only use their credit card to make the purchase. Interestingly enough, those who were paying with credit cards were willing to pay more than twice as much on average as those who were told that they would have to pay by cash. 

An even more recent study by Professor Prelec using Functional MRI (fMRI) technology was able to reveal some interesting facts about our brain activity when spending with credit cards. The study revealed how credit cards motivate spending by stimulating the reward centres of our brain. 

Simply swiping a card provides immediate pleasure in the form of the products bought, with the prices only being realised once the bill comes in later.

In other words, credit cards can create pleasure due to the anticipation of a reward in the form of products purchased, similar to how catching the scent of delicious food being cooked stimulates our appetites. Without sufficient willpower and discipline, this could certainly lead to poor spending habits.

Cards come with risks and rewards

While all of this certainly sounds like bad news, credit cards are not entirely malicious. Credit cards, when managed responsibly, can be a valuable financial tool for making larger payments more manageable, earning rewards and building your credit so you qualify for lower interest rates on future loans. 

No matter what kind of person you are, using a card that is tailored to your spending habits can be a great boon, as long as you can make a habit of not abusing your card. 

Others might say that it is better to use a debit card, since it uses your own savings, and thus makes you think twice about spending. While this may be true, there are a few things that credit cards do better over debit cards. Here is a quick comparison:

Credit Cards	Debit Cards
Funds can be “borrowed” to spread purchases over time, even if you don’t have that money readily available at the time of purchase	Funds are drawn directly from an account
Builds credit history	Does not build credit history
Can lead to debt spiral if not managed properly	Preferable for those who want to avoid building up debt
Interest applies if balance is carried over from month to month	No interest charges
Limited liability for fraudulent purchases	You could be liable for fraudulent purchases

As you can see, both cards have their ups and downs. The right type of card for you will ultimately vary from consumer to consumer.

However, if you are planning to reach some financial milestones and goals such as owning a car, house, or starting a business, you will need a well-developed credit history; and one of the most straightforward ways of building it up is to use a credit card while also consistently paying its bill in time.

Here are a few things that you can pay for with a credit card with relative ease:

Appliances or electronics

Depending on the credit card used, you might be able to score some bonus points or additional benefits when buying appliances and electronics. Sometimes, you might even be able to nab a few extra years of warranty or consumer price protection.

Car rentals and hotel accommodations 

Sometimes, these merchants will require a credit card to cover any incidental costs. Additionally, some credit cards may have promos for hotel accommodations that you can make use of.

Online purchases

Because credit cards usually have more purchase protections in place than debit cards, you may want to consider using them as a primary payment method for all online purchases.

Overseas purchases

Credit cards are pretty widely accepted all over the world. This is why you can see so many promotions for travel credit cards. When you are overseas, it is generally a good idea to have at least one credit card with you, just in case.. It is also a safer alternative to carrying a large amount of cash. Just let your credit card company know you will be abroad for some time so that you won’t encounter any payment issues while overseas.