Why We Spend More When We Pay With Credit Cards


A couple of weeks ago, I decided to treat myself to an afternoon at my favorite shopping destination, Barnes & Noble. Even though I usually have very tight controls on the number of (purchased) books that I may bring into the house, I generally let myself buy two or three new titles a few times a year. (I know. I'm a wild woman.)

It wasn't until I arrived at my personal wonderland that I realized I had forgotten to bring the $30 of fun money I had planned to spend on this expedition. No matter, I thought. I would just charge my book splurge and pay the credit card back out of the cash.

It probably will come as no surprise to learn that I left the store with $60 worth of books rather than the $30 I'd planned.

Clearly, I'm not to be trusted with a credit card in a bookstore.

While overspending by $30 is not a big deal if it only happens once in a while, it can definitely be part of a pattern — a predictable pattern of overspending with credit that can happen to the best of us. (See also: Party Like It's 19.99: The Psychology of Pricing)

This is because consumers tend to pay more money when they use credit cards rather than cash for purchases. Behavioral economists and psychologists have identified two specific reasons why this payment quirk affects us all.

1. Paying Cash Couples the Pain of Payment With the Purchase

Imagine that every time you bought a song on iTunes you had to count out the $0.99 in cash to pay for your purchase. While it's still just as cheap as hitting the download button that's connected to your credit card, it somehow hurts more to think about parting with the cash. Psychologists describe this effect as coupling.

Coupling describes how much an experience of consuming something is tied to the experience of paying for it. When you pay in cash for something, your experience of the product is intimately tied with the feeling of paying for it. For example, if you paid cash to enjoy a few margaritas with a friend, the act of enjoying your drink and the act of paying for it would be directly coupled. The pain of paying is felt at about the same time as the pleasure of the tequila.

But if you instead pay for your evening out with a credit card, the payment is kicked down the road. You distance the pain of payment far enough away from the act of drinking your margarita that they do not feel closely associated at all. In other words, you decouple the pain from the pleasure. This allows you to focus on your enjoyment to the detriment of your bottom line.

2. We Focus on the Benefits of Items Bought on Credit, Not the Costs

An important effect of decoupling payment for an item from the pleasure of buying it is that consumers tend to overvalue the benefits of their purchase.

According to a study by the Journal of Consumer Research, consumers using credit cards pay more attention to the benefits of the product they are buying, ignoring the costs. Because the pain of purchasing the product has been decoupled from its benefits, consumers are more likely to weigh those benefits in a vacuum, without considering the price.

For example, suppose you had $50 in cash to spend on a lovely meal out with your spouse. While the surf and turf sounds delicious, you don't want to be embarrassed when the check comes and your fifty doesn't cover the meal, let alone the tip. So you order from the right side of the menu and end up with a safely inexpensive pasta dish.

If, on the other hand, your plan is to pay for dinner with credit, then you have much less reason to worry about how much the lobster costs per pound. And that means you're more likely to think about how mouth-watering any particular dish may be as opposed to how much it will set you back. A check arriving for double what you planned to spend can be shrugged off if you can pay for it easily with credit.

Refocusing on the costs of an item — or even on its cost-benefit analysis — can be very difficult to do when you have already decided to pay for something with credit. This is what happened to me when I spent double what I planned for books. Because I knew I had a credit card, I didn't even bother to look at how much each book cost, and instead just thought about how much I wanted to read them.

Combating the Effect of Credit on Your Brain

These psychological quirks are of course why so many personal finance gurus recommend that you spend only cash on your purchases. Paying in cash will always keep the pain of paying immediate in your mind — and make it impossible for you to think only about the benefits without considering costs.

But not everyone is able or willing to switch to a cash-only life. For regular credit card users, it might be possible to tie the pain of payment to the enjoyment of purchases by writing down the cost of any particular purchase. This might be especially helpful if the record is a running tally of your credit card charges for the month, meaning you are consistently forcing yourself to see what your entire credit card payment will be at the end of the month. That act of writing down how much each transaction costs could help you keep the price in mind even if you won't actually "pay" until your statement arrives at the end of the month.

Unfortunately, this can be extremely difficult to put into practice. It would require diligence to carry your monthly tally around with you. Force yourself to add to the tally every time you pay with plastic. Overall, if you want to force yourself to be mindful of costs and feel the pain of payment, it is much easier to simply carry cash.

Which is certainly what I will do next time I let myself go for a book shopping spree.

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Guest's picture

This is so true! Paying in cash keeps the pain of paying immediate. It actually feels like it is costing us more.

Guest's picture

I actually have noticed the reverse trend in my spending habits. I have completely sworn off cash. Swiping my credit or debit card forces me to be accountable for my purchases later, whereas once the cash is gone, it's gone. I used to start the week with cash in my wallet and at the end of the week, I couldn't tell you where it went. Once the cash is no longer on my account, I don't think about spending it. Having my spending show up on my account statement forces me to think about what I'm spending, and whether I'll regret spending the money on something unnecessary later when I'm forced to see my balance. Of course, a crucial element is that I do review my transactions periodically (even easier since I started using mint.com) to identify where my money is going and how I can possibly decrease my outgo.

Guest's picture

I agree. It does take discipline to use credit cards, but it's also great as an accountability factor at the end of every month. I don't carry a lot of cash on me either. If you lose it or spend it, you're left wondering what the heck did I do with it? I love to get the rewards on my card and use them for holiday gifts, which saves me a lot of money. As long as you're disciplined with a credit card, and pay it off each month, why not take advantage of the rewards that credit card offer?

Guest's picture

Just another reason to ditch credit cards! For me, credit cards give power to my impulsive buying habits. I've cut up one of my credit cards and retained just one with a 15,000 pesos ($300) credit limit.

Guest's picture

Keeping track of credit card purchases real time can be accomplished easily by managing the account online. A few clicks, and feel the pain....

Guest's picture

I agree with this completely. I can remember as a kid wanting to buy something and separating my money into 2 piles: one to pay for the item and the second was what was left over. I would get sad when I would see the small left over pile. Many times, I passed on the item because I wanted to keep my money. With credit cards, I don't have that feeling. I just swipe a piece of plastic and am done with it.

Now I'm curious to try an all cash method to see what would happen to my spending!

Guest's picture

The title of this article immediately caught my attention and I could not wait to read further. This article is what I actually do. I now pay in cash or I use my debit card because I’ve realized the impact a credit card can do. It can be really hard to stay disciplined but once you are, stay there!!

Guest's picture

After I cut my 3 credit cards, I avoid using it to purchase anything in the store or to use for dinner at the restaurant. Now I have only 1 credit card, I used it to pay online for our utility bill like internet, water, electricity and plane tickets as well for my family.

Based on my personal experience as we develop the habits of paying cash every time we buy goods or personal items, we will not feel the pain of paying immediately.

Guest's picture
David @ Bankruptcy Canada

It's harder to part with cash - it's because you can actually see the money slipping away from you. Whereas credit card is just a representation of your money; hence it's easier to spend when we pay via credit card.

Guest's picture

Gee, I feel exactly the opposite. Cash burns a hole in my pocket; when I have plenty of it, I feel like, "Hey, I've got all this money! I can spend whatever I want!" Only when I get down to my last few bucks do I get chary about spending it. By contrast, swiping that card always feels like a *significant* act, something that needs to be done with deliberation. Maybe that's because I grew up in the era when paying with plastic was a much bigger deal than paying with cash--you had to hold the whole line up while you signed the receipt *on paper*. Isn't that quaint?

Guest's picture

Great read and so true. I liked the itunes example and how our purchase behavior is tied to feelings surrounding product at point of purchase. Consumer psychology, and especially with plastic, is reason enough to be mindful when internet shopping/browsing;-)