I’ve written many times before about how those who carry a balance on their credit cards probably shouldn’t have a credit card at all.  Credit cards aren’t really for credit, they’re for convenience.  They let you book a flight, buy stuff online, avoid having to run to the ATM or use a checkbook, keep track and categorize your monthly expenses, earn a few rewards, have some consumer protection, and benefit from the one month of “float.”  But all those benefits of credit cards may be offset by one very large problem-we spend more when we use credit cards instead of cash, sometimes A LOT more.  A study done at MIT by Drazen Prelec and Duncan Simester was published in Marketing Letters in 2001.  They noted that people spend up to 100% more when using a credit card instead of cash, and that it isn’t just due to the fact that there is no cash in their wallet.  There have been numerous other studies that have said the same thing.  Credit card users are likely to make larger department store purchases per visit, leave bigger tips, and underestimate the amount of recent purchases (or forget the price altogether).  In fact, just putting credit card signs/stickers near where purchases are being made seems to correlate with more being spent, even if they use cash.  (Now you know why every store has a little Visa logo on the door.)

A study out last month by Manoj Thomas, Kalpesh Kaushik Desai, and Satheeshkumar Seenivasan in the Journal of Consumer Research used grocery store loyalty card data to analyze spending habits.  They found that credit card users bought more unhealthy “impulse” food than those who paid with cash.  They recreated this effect in their lab by telling the participants that they could use a credit card vs a group they told would have to pay cash.  Then they used surveys to determine how much “pain” people feel when they spend cash.  It turns out that those who get a great deal of psychological pain from spending cash are less likely than those who do not feel that pain to spend on impulse foods.  But this effect goes away when those people can use a credit card.

There’s also the famous study out there from McDonalds where they showed that credit card purchasers bought 47% more stuff per visit.

Another study I’ve seen, but cannot seem to find at the moment, demonstrated that there is decreasing pain and increasing spending as you move from cash to check to debit card to credit card.  So perhaps using a debit card isn’t necessarily the solution.

Now don’t get me wrong, I use a credit card for nearly everything.  I don’t think I’ve actually used an ATM in over 6 months, and since I don’t have a local bank account, I usually get the small amounts of cash I need from my wife.  But she takes less than $100 a month out of the ATM.  Over 95% of our spending is put on a credit card.  I like the convenience, the rewards (more on this in a future post), and the consumer protection.  We have it set up to autopay the full balance each month out of our checking account.  But I’m well aware that this habit probably means I’m spending more than I otherwise would.  Spending cash IS painful for me, and this allows me to not be such a cheapskate.  But at times in my life when I feel like I’m not quite saving as much as I ought to be (lately it seems), perhaps I ought to go to an all-cash budget.  So if you find you can only put 5 or 10% of your income into retirement, or if you just want to save up for something you really want, ditch the credit cards and see what happens.  (And don’t be like those doctors who think they’re somehow immune to psychologic effects.  Just as doctors detailed by pharmaceutical reps ARE more likely to prescribe their products despite claims to their contrary, you ARE more likely to spend more using plastic than cold hard cash.)