Do Credit Cards Make You Spend More?
With the development and use of financial technology evolving every day, more and more consumers are using cash less and credit / debit cards more. Many consumers don’t even carry cash since the majority of establishments accept plastic and it’s more convenient than a stack of cash. But what is the cost of this convenience and are consumers actually spending more by using their credit / debit cards instead of cash?
First of all, Cash is tangible when you spend it, it’s gone. While credit cards are still tangible, you do not immediately lose anything when they are used. Consumers do not get the same feeling of loss or giving up something when swiping that magic plastic card, this feeling is delayed until the bill arrives. This mentality and growing tendency to use plastic for everyday purchases, has caused an increase in the amount frivolous spending – and credit card providers are making a mean profit on it.
Many credit card providers offer perks or rewards to consumers for each purchase they make on credit, usually 1 – 4% per purchase. These reward credit cards influence the consumer mentality that using credit is better, when people think they are getting something for “free”, they are more likely to use credit for everyday purchases and more likely to mentally justify purchases they do not really need to make. If you are using the right card and pay off your entire bill on a monthly basis, then the rewards are worth it, but if you are spending beyond your means and carrying a balance month-to-month, you can end up spending more in interest than you are gaining in rewards.
There has been evidence that when using credit, consumers are willing to spend more for the same product, than those using cash.
- A study was done in 2001 with MBA students as the subject, the administrators held an auction for sold out tickets to a popular baseball game. Some of the students were told they had to pay in cash and others were told they had to pay in credit. The administrators found that when credit was an option the students offered to pay almost twice as much as they were willing to hand over in cash for the same tickets.
Reward credit cards can be dangerous if not used responsibly…
Marketers have coined the ease of buying with plastic “friction-free spending”, since consumers are much more likely to spend more on everyday purchases using credit than they are using cash. For instance, a $45-dollar shirt seems a lot more expensive when you only have $50 in your wallet, but if your credit card has a $10,000 limit, it does not seem like you’re losing as much. Consumers are not as disciplined when using credit and are more likely to spend beyond their means.
Credit cards offer many conveniences and advantages for consumers, but responsible spending should always be considered when charging your credit account. Even though plastic does not feel like real cash, it is in fact, real money.
At North Shore Advisory we offer our clients access to our educational platform where they can learn how to properly manage credit. This is particularly beneficial to our clients who are working toward taking out a mortgage at an affordable rate by teaching them how to manage their credit cards and debt; this is especially important with the new trending credit data being used by lenders.
If you are looking to take out a mortgage in the near future, keep your revolving balances low, and review your reports at least once every quarter. If you notice incorrect information on your reports, please reach out to one of our credit experts for a free credit review.