2024-02-03 08:59:56
Cash payment is “painful”… but beware of the effects of the magic of credit cards
When you go to buy new clothes, have lunch at a restaurant, or even do your monthly household shopping, you may find that using a credit card is different from paying in cash. Swiping a piece of plastic or metal doesn’t make you feel like you’re spending real money at all.
In this context, research shows that people are more likely to overspend when they pay with a credit card rather than cash. One reason may be that using cash to make private purchases is a more transparent process than using credit cards, where you take money from your wallet and hand it to someone else, and see the amount you have in your wallet decrease. On the other hand, when you pay with a credit card, you basically don’t notice your card balance at the time of purchase, and you don’t pay your bill until the end of the month.
Psychology researchers at the Massachusetts Institute of Technology revealed that “people tend to spend more when using credit cards, compared to those who pay with cash.”
People tend to spend more when using credit cards, compared to those who pay with cash (Reuters)
The psychology of using a credit card
Numerous studies have shown a clear link between credit card use and increased spending, and one of the most famous studies comes from Drazen Bralic and Duncan Simster of MIT.
According to the study, the couple held an auction for tickets to coveted sporting events. Participants were limited to using cash or credit card to bid on tickets. They found that those using credit were willing to pay up to twice as much as cash buyers for tickets.
Other studies have found greater differences between cash and non-cash payments. One study conducted by the Federal Reserve Bank of Boston found that the average value of a cash transaction was $22, while the average non-cash transaction was $112.
The psychological reason behind these behaviors may lie in a concept known as “mental accounting” and behavioral biases, such as loss aversion.
Why do people treat credit cards differently than cash?
According to the theory behind mental accounting, people place different values on the same amount of money according to subjective criteria, such as the source of the money or its intended use. In other words, they don’t think regarding all the money they have coming from the same pot, so they may treat cash and credit cards differently.
According to a classic experiment conducted by two pioneers of behavioral economics, Daniel Kahneman and Amos Tversky. Participants were asked to consider two scenarios. First, they were asked to imagine that they had purchased a $10 ticket to a play in advance, and upon arriving at the theater, they realized that the ticket had been lost. They were then asked if they would buy a replacement ticket.
Cash purchases increase a phenomenon known as “payment pain” (Reuters)
In the second scenario, people were asked to imagine that they had not yet bought a ticket. When they get to the theater and open their wallet, they realize they’re missing $10. They are asked if they will still buy a ticket for the play.
More than 88 percent of people were willing to buy a ticket in the second scenario, while half that number were willing to do so in the first scenario. People in the first scenario felt the ticket price had doubled, even though the end result in both scenarios cost the same. Individuals in the first scenario had already calculated how much they were willing to spend on a theater ticket. When they saw the cost double, the situation became untenable.
Other behavioral biases also play a role, as credit card spending creates a space between the purchase and the actual payment, separating the two in people’s minds. Spending with credit cards reduces the effects of a behavioral bias known as loss aversion, which is the tendency to feel losses more acutely than gains. Since individuals do not see the money leaving their hands when using a credit card, the effects of loss aversion are reduced.
When these biases arise, individuals who use credit cards may spend more on things they don’t need, or can’t afford. Because there is a delay between the purchase and the pain of paying, credit card users may be more vulnerable to making impulsive purchases and accumulating credit card debt.
“Pain of payment”
On the other hand, using cash can be a completely different experience for consumers. Cash purchases increase a phenomenon known as “payment pain” as consumers see money leave their wallet. According to one study, consumers actually feel psychological pain when spending cash, which reduces the desire to buy.
On the positive side, there is evidence that paying with cash increases individuals’ attachment to the product or service they are purchasing. In fact, people who use “painful” payment methods are more emotionally connected to the products and are more likely to make repeat purchases of the products.
I don’t prefer using credit cards but they are still useful sometimes or situations like traveling (Reuters)
Credit cards bring happiness?
If you’re a fan of shopping on sites like Amazon, where studies have shown that consumers are willing to spend more when they charge up on their purchases, it makes sense to have credit cards ready for impulse purchases.
For many impulsive buyers, shopping may be a way to lift their mood, consumer psychologist Ian Zimmerman explained in an article for Psychology Today.
“The impulsive buyer loves the product and feels happy when he thinks he can buy it right away and take it home,” he wrote in the article. The impulsive buyer cannot resist the urge to buy the product and does so, without considering whether it is expensive and/or frivolous.”
“With credit cards, because you’re not paying for something the moment you buy it, spending your future money is less psychologically painful than spending your current money,” he explained.
He pointed to the phenomenon known as “payment coupling,” which studies indicate is the time lag between the time you choose to buy something and the time you actually end up paying for it. As for credit cards, because you don’t pay for something the moment you pay for it. If you buy it, spending your future money is less psychologically painful than spending your current money.
Credit cards don’t help you save
Research published by Forbes magazine confirmed that 45 percent of credit card holders “do not know the costs of their monthly expenses.”
The study found that “the size of expenses and the moral value of purchases are not clear to credit card users, unlike those who pay in cash.”
When do you choose to swipe the card?
Despite the risks of using credit cards, they are still useful in certain situations or situations, such as traveling or renting cars, booking hotels, and purchasing plane tickets. Credit card transaction fees may be cheaper than the fees you’ll pay to withdraw cash when traveling abroad. If your card is lost or stolen, the credit card company will protect the customer.
But when it comes to paying for things, it may not be as simple as, “Is it better to pay with cash or a credit card?” However, being aware of behavioral tendencies can help you spend wisely and balance credit card and cash usage appropriately.
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