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Curse of the Credit Cards

Previously, I have posted a historical overview of the developments in payment methods. The main focus being on the introduction and uptake of the credit card. The credit card was quickly accepted and became a staple for each and every household. At the time of its introduction it was assumed that money was fungible. This means that it does not matter which method is used to spend the money, the results would be the same. Therefore, the credit card would replace cash without any side-effects. However, research has found plenty of side-effects when it comes to credit card usage. In this article I will outline the most pressing issues.

Debt There is no denying that credit card debt is a massive issue. Statistics provided by the Money Charity show that the average credit card debt is a whopping £4,087 per adult in the UK. Total credit card debt in May 2018 was £71.6 billion. Per household this is £2,634. Taking the average interest rate for a credit card, it would take 26 years and 5 months to repay the full debt. This is assuming that most households only repay the minimum each month.

A big issue is that all these statistics are all-time high records. An even bigger issue is that these numbers keep rising…

Knowing these statistics, it is hardly surprising that there is substantial evidence suggesting that consumers who predominantly use credit cards overspend relative to those who do not (Runnemark, et al, 2015; Soman, 2003; Tokunaga 1993). Prelec and Simester (2001) even suggest to “always leave home without it,” as the mere option of paying by credit card increases the willingness to pay for a product or service. This increase in willingness to pay is because, unlike cash, the credit card does not signify a limited amount of resources.

The list of studies showing higher expenditures on cards compared to cash is endless. And rather than describing all of these studies, I’d like to propose reasons for why using a credit card leads to significantly higher expenditures.

Impulse control The increased spending and debt accumulation of the credit card have been blamed on its inability to limit impulse control. Cash is magnificent at limiting impulses: If you don’t carry (enough) cash, you can’t spend it. There is no such severe limit on the credit card. The only real limit is its maximum balance, which most credit card providers are willing to increase if you just ask nicely…

The issue with impulses is that most people need punishment to resist them. Punishment is provided when using cash. Paying with cash hurts. You know exactly how much you are paying. You can see the money leaving your hands. It is a physical transaction. There is a sense of loss (Zellermayer, 1996).

The credit card makes this process much easier. As said before, there is no real limit. No physical value is leaving your hands. There are reduced or no feelings of loss. The purchase is done in blissful ignorance of how much you really have spent and how much is left. This promotes further spending.

Spending is not the only impulsive behaviour the credit card promotes. Research by Thomas et al (2011) finds a strong relationship between credit usage and unhealthy food purchases. Compared to people who paid for their groceries by cash, those who use credit cards were more likely to have purchased candy, soft-drinks and fast-food.

Now you are living on a high with endless amount of credit, surrounded by fast-food. Life is good. Until you get a credit card bill that is twice the size of what you thought it was. How did this happen? Again?!

Memory The continuous tracking of your expenditures and credit card balance is difficult. It is easy to track cash expenditure. You literally see what you’re losing, and what is left. No matter how hard you stare at a credit card, its plastic shine will not magically reveal your credit card balance.

Studies by Raghubir and Srivastava (2008) have shown that people have issues memorising their credit card bill. When it concerns multiple expenditures, people are extremely inaccurate estimating how far into debt they are. When using leading questions, mentioning specific expenditure categories such as: “How much did you spend on the credit card, going out for dinner?” Estimates did improve, but were still far from accurate. It will not be surprising to find that most people underestimated their credit card bill. People who were asked to estimate their cash expenditures were much more accurate in estimating their expenditures, whether the questions asked were regarding specific expenditure categories or not.

Gross and Souleles (2002) also argue that the increased spending with credit cards is related to lessened awareness of spending, leading individuals to not correctly update their account balance and spend money “twice”. In their survey, people were asked to estimate both their balances and expenditures and their answers were compared to their bank account information. The more expenditures had been made, the less accurate the estimate was. Moreover, the people who had the least accurate estimates, were those who were the most likely to continue spending on their credit card.

So that’s the credit card: increased debt as a result of reduced impulse-control and reduced accuracy of expenditure recall.

What I have touched upon here is only a rough overview of the tip of the iceberg. In the next article I will elaborate on the reduced salience of credit card spending driving the impaired impulse control: the pain of paying.

References Gross, D. B., & Souleles, N. S. (2002). Do liquidity constraints and interest rates matter for consumer behavior? Evidence from credit card data. The Quarterly journal of economics, 117(1), 149-185.

Money Charity, the. (2018) The Money Statistics July 2018. Retrieved 06/08/2018

Prelec, D., & Simester, D. (2001). Always leave home without it: A further investigation of the credit- card effect on willingness to pay. Marketing letters, 12(1), 5-12

Raghubir, P., & Srivastava, J. (2008). Monopoly money: the effect of payment coupling and form on spending behavior. Journal of Experimental Psychology: Applied, 14(3), 213.

Runnemark, E., Hedman, J. and Xiao, X. (2015). Do consumers pay more using debit cards than cash?. Electronic Commerce Research and Applications, 14(5), pp.285-291

Soman, D. (2003). The effect of payment transparency on consumption: Quasi-experiments from the field. Marketing Letters, 14(3), 173-183.

Thomas, M., Desai, K. K., & Seenivasan, S. (2010). How credit card payments increase unhealthy food purchases: visceral regulation of vices. Journal of consumer research, 38(1), 126-139.

Tokunaga, H. (1993). The use and abuse of consumer credit: Application of psychological theory and research. Journal of economic psychology, 14(2), 285-316.

Zellermayer, O. (1996). The pain of paying (Doctoral dissertation, Carnegie Mellon University).


Behavioural Science

Personal Finance



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