Have we come to rely too heavily on the use of credit cards? In recent years, credit card use has increased and increased. This is particularly true in real-world shop settings, where the swiping of a card is often the easiest option. However, is it always the wisest thing to do? With the growing debt problem and more people relying on short term finance, are credit cards just compounding the issue? A study from McDonald’s found that their average transaction cost rose from $4 to $7.50 after they started allowing credit cards. Of course, this is just one example, but it does appear to be indicative of a larger trend. Why might it be that using a credit card vs cash means that the consumer will probably end up spending more? Is there one clear reason, or a variety of influential factors?
To get to the bottom of this, we are going to take a look at the psychology of using your credit card vs cash. What happens in your brain when you buy something?
The Effects of Marketing
If you have ever wondered why you left the supermarket with more than intended, you won’t be surprised to learn there are many factors in play. To begin with, we have the very powerful effect of marketing and advertising. However much we like to believe that we are not affected by marketing, in actual fact, we are almost slaves to advertising. As soon as you walk into any shop, you are immediately bombarded by a thousand different signals. Ideally, the marketers are hoping that you will barely recognise most of these. Even if you do, you will probably forget about them. Yet, next time you are in that same shop, something recognisable will pop out at you. Often, we pick up items from the shelf without knowing why. There is just a sense of recognition, and something says: ‘Yes!’ This is marketing at its diabolical best.
But it is not just in the item choices we make. The truth is, various psychological factors also govern the act of spending itself. All of us tend to fall into spending habits. (The fun starts when your spending habits clash with your partner’s or spouse’s habits.) No matter what, there are certain ways of doing things that you ascribe to without knowing it. Most people don’t think too deeply about many of the purchases they make. Sometimes, this results in impulse buying. But, it can be more subtle than that. One place we see this playing out more subtly is at the checkout itself.
When it comes to the actual act of handing over money, something interesting happens. Many people seem to experience a slight moment of blindness at this point. Depending on the person, it might be because there is some harboured guilt around the act of spending. Somehow, no matter how much disposable income we have, we often feel guilty when spending money. This can be the result of certain social and cultural pressures. It is also something to do with the fact that this momentary glitch enables us to feel better about the purchase itself. But is it possible that there is a significant difference between paying with credit card vs cash?
As humans, we are affected by the experiences we have. Primarily, this means that we make decisions based on what we see and feel. This is the key to understanding the psychological differences between spending with credit card vs cash. When you make a purchase with cash it does, in a profound sense, feel much more real. The fact that you can physically see something changing hands makes a huge difference to how you feel about it. You will be a lot more aware that an actual transaction is taking place. This, in turn, means that you are more likely to ascribe the proper value to the money. And that means you will probably be more careful about how much you spend.
Conversely, using a card takes you away from the reality of the expenditure. With a credit card, you can experience the transaction from a distance. In a real sense, it is as though you are not really spending any money. This, of course, means that you are likely to spend more. If it doesn’t feel like you are paying anything at all, you can easily become looser with your control. It is also the case that the easier the credit card is to use, the less it seems as if you are spending real money. So swiping a card, or using contactless is much more dangerous, financially, than having to enter a pin number. And that is not quite as good as having to sign your name. When you sign your name, that is at least a formal acknowledgement of the fact that you are spending money. As credit cards become easier to use, their use increases, and so too does debt.
It is evident, then, that when comparing credit card vs cash, using a credit card is not the same as paying with cash. If you pay with a card, you are much more likely to overspend – and do so more often. This explains the findings of the McDonald’s study, and it also helps to show why so many people are struggling with debt. Fortunately, there are ways around this. Of course, the simple solution is just to say: don’t use your credit card. However, the fact is that cards are incredibly useful. No matter who you are, chances are you occasionally have the need to use a card. Nonetheless, there must be some way to reconcile both. Surely we can have a credit card, and not allow it to get us into significant debt?
Say Goodbye to Credit Card for Two Weeks
One of the best pieces of advice I heard is to use cash only for a limited period. Doing this just once will give you a good idea of the considerable difference that it makes. For a specified amount of time, do not use your credit card. This means withdrawing a set amount of cash, and only using that. Going about spending in this way makes it much more likely that you will spend wisely. You will feel more primally attached to your money, rather than being disconnected from it. Consider this as an early test. Use cash for a while, and see how it affects your spending. Also try to pay attention to how it feels using cash rather than card. Chances are, you will be pleasantly surprised at the difference.
Switch from Credit to Debit Card
If you are keen to take better control of your finances, then it might also be worth swapping in your credit cards for debit cards. With a debit card, you might have the same problem of overspending. The difference, however, is that you are not just immediately creating debt in the process. As such, you might find this to be a marginally more beneficial way of spending money. Managing debt is not easy, and you don’t want to start taking out one a payday loan online to cover your credit card bill. Using a debit card helps you avoid the world of debt altogether, leaving you in a much safer financial position.
Ultimately, using a credit card offers you high consumer protection and ease of use. However, the downside is that you can all too easily overspend this way. Something which practically everyone could benefit from is only using credit cards in an emergency. The rest of the time, use cash wherever possible. And if you have picked up too much for the money you have on you – put something back. As long as you follow this simple advice, you will find that your finances are a lot better off in general. When it comes to spending, we are all sometimes guilty of overspending. But with these simple approaches, you can soon take back control. With that, you might also find that your debt situation improves plenty as well.