Do Credit Cards Make You Spend More?

UponArriving is largely dedicated to educating the masses (along with myself) about the value of credit cards. But it always is crucial to remain fair when weighing the benefits of credit cards with all of the potential cons. One of the biggest cons that people often (justifiably) worry about is whether or not credit cards make you spend more money.

One of the most familiar studies on this question came from Dun & Bradstreet. It found that people spend 12-18% more when using credit cards instead of cash. It’s been shown that at fast food joints like Wendy’s and McDonalds, people are willing to spend more when using credit cards versus cash.  Some studies dispute the findings to a degree, but based on everything I’ve researched, I’ve got very little doubt that credit cards cause the average person to spend more.

But why is that and what can you do about it? 

Why do we spend more?

On an instinctual level, it’s possible that paying with plastic is fundamentally at odds from the way that we’ve evolved to think about exchanging goods. The USA Today makes this interesting observation.  Basically, thousands of years ago humans bought goods by trading tangible items. So, for example, in a standard transaction you might trade a fur pelt for 12 fish. A couple of sheep for a few pounds of silk. You get the idea.

These items could be felt and thus there was a strong sensory connection to them. Even more importantly our brains could associate many of these items with important needs, such as hunger or warmth. So when you handed over a dozen snapper, you had a very real valuation for those fish that was based on your survival and you would truly feel the “pain” of handing over something valuable.

As time went on and we developed currencies, our way of exchanging items for goods changed but we still had tangible items, such as coins and bills to use when making purchases. These items weren’t as closely connected to our senses as past items but at least they were still tangible and we would still see and feel their loss when handing them over.

With the switch to plastic, however, we no longer see or feel the loss of what we’re giving up. This is largely what the Dun & Bradstreet study is based on. Simply put, it’s less painful to hand over a card (and get it back) versus handing over cash and not getting it back.

This problem is made even worse by several other psychological factors working to incentivize us to spend.

There’s a “decoupling” effect so that the actions of buying and paying no longer occur at the same time. Payments are due 30+ days after a purchase, making it easier to buy something without fully considering the effects that the payment will have. For many, the desire for immediate gratification outweighs potential consequences caused by the purchase because those problems don’t present themselves immediately. This can be a real source of trouble for people who struggle with making impulsive decisions, which otherwise would not be possible if they were limited by the cash they had on hand.

Another psychological issue is that grouping transactions together can make them appear less significant. For example, a $50 purchase won’t feel as much of a hit to the wallet when its being piled on top of a $1,500 credit card bill.

And then throw in the credit card rewards. I’ll be the first one to admit that I’ve been guilty of allowing rewards to incentivize me to go forward with a purchase. It may not be the reason I make the purchase, but I’m sure it’s tipped me into the direction of making a purchase before. Receiving that positive reinforcement with every purchase is an effect that I think a lot of people underestimate. This is not only common sense but has been shown to true in studies in case you doubted it.

What can we do to limit to spending?

I don’t think there’s one secret to fighting off these psychological forces that tempt us to use our credit cards more. I think it just requires constant diligence. If you don’t budget your finances, then you need to pay extra close attention to your spending habits.

At the very least you should monitor your spending habits by reviewing your monthly statements. Scrutinize every little purchase and ask yourself has it really made your life better? If after 30 days you can’t answer that with a definitive “yes,” you probably didn’t need that purchase in the first place. 

And don’t allow credit cards to allow you to get lazy about subscriptions and recurring costs. If you’re currently paying a monthly fee for gym access and you haven’t stepped foot into a gym and done a sit-up in 120 days, it’s probably time to cancel.

Finally, even though I love credit card rewards, they shouldn’t be a factor at all when thinking about making a purchase. Sure, once you’ve decided to make a purchase, you should figure out how to maximize your rewards. But it will never make sense to decide to make a purchase just because you’re earning 2-10% cash back — I don’t care how many points it lands you the math will almost never add up.* 

*In rare circumstances you can profit on purchases but those are not very common.

Final word

Overall, it’s not shocking to me that people would spend more with credit cards than they would with cash. Using cards just doesn’t give us enough “immediate punishment” and it replaces that with instant gratification. Add in other psychological factors at play it’s not surprise that people would spend more on their cards. The key it to constantly scrutinize your purchases and monitor your spending habits so that you don’t go overboard with your spending.