Wednesday, May 2, 2012

Why You Spend More with Credit

This is a guest post from David Rodwell, an experienced writer who covers everything from business to personal finance. Check out his site for similar articles!

For a long time now, experts have suspected that using a credit card means spending more than if you use cash. It isn’t simply the extra money you pay in interest (although that really ought to be a factor when you pull out the plastic) but new research shows that you are less likely to worry about price when you’re using credit compared to using cash.

Promothesh Chatterjee from the University of Kansas and Randall Rose from the University of South Carolina recently produced some groundbreaking research that looks directly at the impact of using cash vs. the impact of using credit cards on purchases. What they discovered was nothing short of astounding.

As it turns out, the method we intend to use for payment not only impacts the decision we make in terms of which product to buy, it even impacts our memory of the transaction.

Here are some of the most interesting findings:
  • Credit card payments mean a focus on benefits. Consumers who were using credit cards were more likely to look at the benefits of a selection of products than they were to look at costs.
  • Cash customers are more likely to focus on cost. Those customers paying with cash were more likely to be concerned about cost than they were about benefits.
  • Credit customers were more likely to make indulgent choices. In many cases, that meant picking a high-image product over a product with equal function.
  • Cash customers were able to focus on many aspects of cost. For example, cash customers looked at the product cost, delivery cost, warranty cost, installation cost, and even delivery time, whereas credit card customers weren’t as likely to focus on that information.
  • Consumers were more likely to choose a credit card for payment when primed. Various triggers for credit card purchases – such as having the credit card logo on the entry door or the cash register – made consumers more likely to choose that method of payment.
  • This phenomenon actually affected memory. Consumers who paid with cash were less likely to remember benefit-related words after a transaction took place, whereas credit card customers were more likely to have memory errors in regard to price.
  • The physical medium of payment plays a role. Even though gift cards spend more like cash because there is a finite amount that drops each time the card it’s used, gift card customers behaved more like credit card customers. Spending money is less obvious and less transparent, which means it’s more like using credit.

So, what does all of this mean? It means that our buying decisions aren’t nearly as independent as we’d like to think they are. Something as simple as your chosen payment method will impact the quality and price of the product you choose.

Not only that, it raises some interesting principles for consumers. For example, if you want to save money on a given purchase, make that purchase with cash. If you want the best in breed, choose credit card payments and you’ll be able to focus on benefits.

1 comment:

  1. Rewards are the main reason I use credit cards over debit card and then at times I find myself trying to meet spending requirements to get that extra bonus on spending a certain amount.


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