Study: Credit Cards Cause More Spending
Credit: AP
Credit: AP

If you're trying to save money, leave your credit cards at home and pack cash only.

A four-part study found what many financial planners already knew: People spend more money when using credit cards compared to cash purchases. People also spend less when they look at their expenses in detail, the researchers found.

Consumers simply feel the pain of paying more when they part with cash, the researchers, led by Priya Raghubir at New York University, write in the September issue of the Journal of Experimental Psychology: Applied.

  • In one study, 114 participants estimated how much they would spend using cash vs. credit for a well-described restaurant meal. "People are willing to spend (or pay) more when they use a credit card than when using cash," the authors wrote.
  • In a second test, researchers highlighted the future pain of paying by having 57 participants estimate food expenses for an imaginary Thanksgiving dinner item by item, rather than just as a total. When they did this, the cash-credit spending gap closed. When people confronted the detailed reality of expenses, it no longer mattered whether they used cash or something else, the scientists conclude.
  • Then 28 participants were given a detailed shopping list to work with. In a questionnaire format, spent more when they used a $50 gift certificate instead of $50 cash.
  • Finally, 130 participants were given $1 cash or a $1 gift certificate to buy candy. At first, they were more willing to spend the gift certificate than the cash. But after holding the gift certificate in their wallets for an hour, they became less likely to spend it, indicating the the certificates came to seem more like real money.

"The studies suggest that less transparent payment forms [such as credit cards] tend to be treated like [play] money and are hence more easily spent (or parted with)," the researchers argue.

Financial planners have long encouraged people to avoid credit-card purchases as a way to save money. Doug Borkowski, director of Iowa State University's Financial Counseling Clinic, counsels students on the subject.

"I have found that if a young person understands that the same amount of money they pay every month for a minimum payment on their credit card could potentially make them a millionaire by the time they reach 65, they might think twice about using that credit card," Borkowski says.