People are far more willing to buy big ticket items on credit than if they are paying with cash they’ve saved up, a new study has found.
The report from American financial researchers Value Penguin found people were willing to spend up to 83% more with their credit card than they would paying with cash.
Psychologists believe this is because credit means the pain of paying is delayed whereas, when paying up-front, the immediate pain to your pocket can reduce the pleasure of consumption.
Another reason for increased spending on credit cards is linked to consumers focusing on the rewards and benefits, rather than the cost.
“Credit card users were 28% better at recalling aspects related to a product’s benefits than cash users.
“Conversely, cash users were 82% better at recalling aspects related to an item’s cost rather than credit card users,” the report said.
“The key thing to remember is to do a quick ‘financial reality check’ before you take the credit card out of your wallet for a purchase,” says Dr Pushpa Wood, Director of Westpac-Massey Fin-Ed Centre.
“The financial reality check may include questions like: Do I really need to buy this item on the credit card? Can I save and then buy it? Will I have sufficient funds at the end of the month to pay it off in full and of course a million-dollar question – is it a need or a want?” she said.
Part of the study looked at student sports fans who were bidding on tickets for Celtics and Red Sox games.
They found that business students would spend 83% more when buying tickets with a credit card instead of cash.
Participants weren’t given any information on the market value of the tickets and were not given any information to influence their valuation of the ticket prices.
“This means that the difference in the bid amount between the cash and credit card groups is directly affected by their subconscious willingness to pay more when using that payment method,” the report said.
Customers in the US study were also found to tip 13% extra when paying a restaurant with their credit card instead of cash.
A $47 restaurant bill on average received a 15.4% tip when paying cash, but a 17.1% tip on the credit card.
The psychological concept which links purchase decisions to parting with money is called ‘payment coupling’.
“When people make purchases there is an immediate pain of paying which can reduce the pleasure of consumption... whereas making the benefits of the purchase salient may blunt the pain of paying,” a previous study on spending behavior from the American Psychological Association said.
“The higher spending with credit cards relative to cash has been attributed to the temporal separation of the purchase from the actual payment in the case of credit cards or the decoupling of the purchase from the payment,” the Journal of Experimental Psychology said of the study.
“Remember to understand how the credit card interest works before you start using it freely,” Dr Wood says.
“Paying it off at a ‘minimum payment’ rate does restrict your future borrowing capacity and incurs further interest,” she said.