Do We All Really Spend More with a Credit Card?

There are two sides to the credit card debate:

• The first says that it's ok to use credit cards (and even try to maximize the amount you put on them to get the most rewards) as long as you follow certain guidelines such as only buying items in your budget, paying of the cards every month, etc. This viewpoint believes that people can control themselves and are responsible for their actions. This is the side I personally advocate.

• The second says that credit cards are evil and that you should stay away from them. This viewpoint says that people naturally spend more with credit than they would otherwise and that people can't control themselves (thus, they shouldn't have credit cards.) This view is espoused by Dave Ramsey (though he does accept credit cards.)

These two viewpoints can be debated forever, but what I'd like to focus in on is one key issue: does having a credit card really make you spend more? Let's start with this piece that quotes a study on the issue:

In order to answer that question, we have to look at the behavior of people who use credit cards, versus those who don't. Dunn and Bradstreet did a study which made this comparison, and the results that they found were quite surprising. Statistically they found that on average you will spend 12-18% more when making a purchase with a credit card as opposed to cash. They also discovered that the average McDonalds transaction increased from $4.50 to $7.00. When they looked at vending machines, the average transaction size nearly doubled. 

This point was brought up by a reader who commented the following on my post titled Becoming a Money Manager:

I agree with most of this, but I couldn't disagree more with your stance on using a credit card.

Some bills I pay through auto-debit, while others get paid through my bank via bill pay, thus, no postage costs.

When I use my debit card for everything, I get cash back every month from my bank. Usually it's about $7 or so, sometimes more, but usually not less.

The bonus is that I never have to sleep with the snakes in the credit card industry. I never spend more than I can, and I never have to worry about a late fee. I know, I know, "I pay it off every month..." If I had a nickel....

There's also the study done by Dunn and Bradstreet about credit usage that is frequently mentioned here, but most folks collectively deny it because they don't believe it or they think it doesn't apply to them... You're not spending my money, so I really don't care what you do, but to deny something that's been proven many times is just ignorant. See the hyperlink for more info on credit use and the Dunn and Bradstreet study. It's just one example, there are many more out there that show the same thing. You should really address this issue sometimes if you really want to help people, as I'm assuming your blog is designed to do.

We'll get back to this comment in a minute, but for now, here's a rebuttal from another reader of that post:

This isn't so much a comment on the post, but a comment on Tom's comment. Even if there is a tendency for people to spend more when using a card (though the notes on the link seem to question whether that D&B study is accurate), this could be simply an effect of selection bias.

For example... I go to McDonalds for lunch, and pay with cash, because I have an aversion to using a credit card for a $5 charge. I probably have the cash on hand and feel that it’s simpler. For that matter, some merchants have a transaction minimum for accepting credit card payments (though maybe not McDonalds).

Second scenario: I go to McDonalds and buy dinner for my family for $20. I don't have a $20 in my pocket, so I charge the meal. Everything is the same, only I feel more comfortable using a card for a higher dollar transaction.

So, the reasoning isn't "well, I'm using a card, so I may as well Supersize it since its not real money", its different kinds of transactions for cards and cash.

And another:

Tom -

While your point may be correct for "most" people, I hope you can admit that there are some out there that use credit cards to our advantage and don't overspend. Even Dun & Bradstreet admits it implicitly in this quote from the article:

"Statistically they found that on average you will spend 12-18% more when making a purchase with a credit card as opposed to cash."

"On average" being the key words. Like Colin pointed out, when I go to Starbucks to get a coffee, I get the same coffee whether or not I pay with cash or credit. Also - what about the fact that debit cards are issued through either Visa or Mastercard - so you are in fact dealing with "snakes" in the CC industry.

Like I said before, using the credit card for everything but a few bills that are autodrafted smoothes out my cash flow and makes planning what to keep in checking and what to move to higher yield MM account much easier. But at least you have a plan Tom, that's more than most people.

Ok, so maybe people overspend by simply having a credit card and maybe they don't. To me, the key question left remaining is WHY they supposedly overspend if they have a credit card. Back to the Dunn and Bradstreet study for some potential reasons:

One of the reasons could be that credit cards make it much easier to spend money. When you make use of a credit card, all you have to do hand your card to the cashier and sign your name to the receipt. You don't have to worry about if you are spending too much money, and there is no emotional connection that you are letting money leave your possession. When you pay in cash, you have to stop and think about whether or not you will have enough to pay for the rest of your purchases until you go and get more money from the bank. There's an emotional connection between you and your money, and when you let it go, it hurts a bit to do so.

With credit cards, you are also much more likely to make large impulsive purchases. This is because you have access to a lot more money right away than if you were only carrying cash around. You might carry around $50 with you if you paid in cash, but with a credit card, you have a $10,000 limit or so for purchases! You can buy what you please on the spot. With cash, you have to go down to the ATM or bank and take the money out.

Ok, so there are a lot of ideas/thoughts here. Let me address the major ones I see:

• Point #1: Credit cards are more convenient -- that's why I like them. Think about all you buy in a day -- food, gas, clothes, etc. And imagine if you're on a business trip -- airfare, rental car, hotel, etc. If you had to carry enough cash to cover all of these, it would be a REAL hassle (not to mention a potential security issue.) I would agree that cash would probably make you spend less in these cases, but not because you'd want to spend less -- it might be that you actually want to buy something (maybe as simple as a lunch) and can't get it because you don't have enough cash on hand. Some readers will say "See! You admit it!" What I say is that carrying only cash is an inconvenience I can't afford, and even if I do end up spending more (which I'm not saying I do), it's worth it in time and frustration savings.

• Point #2: There's no difference between a credit card and a debit card regarding convenience, so the "debit card is better than a credit card" debate is dead. For people who pay off their credit card every month (which is one of my requirements for carrying a card), there’s really no meaningful difference between a credit card and a debit card.

• Point #3: You'll make more impulse purchases with a credit card. Maybe, maybe not. But if you want something and can afford it (meaning you pay it off every month), who's to say you can't or shouldn't buy it?

• Point #4: Just because the averages spend more, doesn't mean I do (or that a ton of other people do as well.) The averages have a zero savings rate. The averages make a lower income than I'd like. The averages have a paltry net worth. I don't have to settle for (or be locked into -- however you want to look at this) the averages -- and I refuse to be. I manage my money, my credit, my investments, and so on -- they don't manage me.

That's enough for now. There are probably a few points I missed, but this post is getting too long already. It's time to hear what you think. What's your take on this issue?

Comments

[pink panther]

Seems obvious that overspenders do more damage with credit cards, because with debit cards and cash you have to stop when you run out of money :) I think it's an individual's mental approach to money that determines spending, not what they use. So I don't know what these surveys are really telling us, other than people with discipline are in a minority... :)

[kitty]

Totally agree with all of your 4 points and with the first comment.ac D

I think the people in Dave Ramsey's camp confuse "people spend more on average with a card" with "everyone spends more when they use cards". As I mentioned in one other thread, take 5 people, one lives beyond one's means, spends twice more than he has i.e. 100% more than he would've with cash. Even if the remaining 4 spend exactly the same with credit cards than they would've otherwise i.e. 0% more, if you count the average you'll get "people spend 20% on average". IMHO, with so many Americans carrying credit card balances, it is amazing that the statistic shows that the average cited in these studies is only 12-18%. Show me a study that only includes those of us without credit card debt, then I'll believe it. I am yet to see any mention of distribution of extra money spent between money participants, and without it, it's difficult to make any conclusions.

Another point is that without actually reading the study details, we cannot make any conclusions about methodology, conclusions, accuracy. How many times we've seen how journalists report on a medical study and then it turns out that it hasn't really shown what the journalists said.

As to this McDonalds study, it appears to have only looked at average transaction not the distribution of these transactions among customers. Or even items purchased. You already mentioned about using credit cards for larger transactions - I'd imagine most credit card users do it. Also, is it same customers who spend more or is it other customers - those who would've went to a more expensive place if McDonalds hadn't been taken cards? Say you want to eat and you are out of cash. You can go to a restaurant that takes cards and pay $15 or you can go to McDonalds. If the nearest McDonalds doesn't take cash, you go to a restaurant. Otherwise, you go to McDonalds. So while you spent more at McDonalds than their average customer, you actually spent less than you would've at a restaurant.

Personally, I have emotional attachment to money in whatever way, shape or form it comes. I hate getting my card out just as much if not more than paying cash. At least with cash, I stopped counting it the moment I took it out from an ATM. With card, I know that it'll still have to come out from my account. So sure, I think before using a card. Looking at a large bill is a whole lot more unpleasant than spending some pocket change.

[gtFMF]

I think freakonomics would have a blast with these statistics. I think they're not comparing apples to apples.

It could be that there is a third, entirely separate, differentiator that makes people use credit cards AND buy more junk food. You can draw a correlation between credit card use and amount spent at a transaction but I don't think you can simply state that using credit cards causes more spending.

Maybe it's the other way around, like another commenter pointed it out: more spending causes use of credit card. If you spend $5 on a meal you might be more inclined to use cash but as soon as the amount goes over $7 you whip out the card.

Maybe people who are higher income tend to use credit cards more often than people with lower income and people with higher income tend to buy the premium items from the McDonald's menu instead of the double cheeseburger for a dollar.

There are just too many unknowns to be able to draw any kind of conclusion from this study. It's a correlation but I'd be very careful to declare causality one way or the other.

[MonkeyMonk]

Regarding point #2:

Debit cards in many ways are far *worse* than credit cards. 1) The money is instantly removed from your account, therefore you're losing interest; 2) You lose a lot of the safety features built into credit cards, e.g., chargebacks, insurance; 3) Dealing with issues of fraud can be much more painful with debit cards (you're limited to $50 of liability with CC -- not so with a debit card); 4) You lose any rebate or reward perks, although many banks are now offering perks with debit card use. Of course, the above assumes responsible credit card usage.

I also agree with FMF comments regarding averages. I personally exceed the averages by a significant amount in just about every area of money management and personal finance. Why should I think the averages in this case would apply to me as well?

[Mr. ToughMoneyLove]

I think many are over-analyzing the study and trying to substitute anecdotal evidence. There is logic benind the study results. Using credit cards does not cause more spending, it enables more spending. It starts with being financially disciplined. Even some of those who are paying off their credit card balance every month are still living paycheck to paycheck. They use the credit card as a cash flow crutch. If you use only cash, many impulse purchases are thwarted by having an empty wallet. If you use only a debit card, many impulse purchases are thwarted by having a low bank account balance. So using credit cards enables poor cash flow management and facilitates impulse buying, which is why the study came out the way it did.

[rwh]

There is a difference between using debit cards and credit cards, at least in my situation. My checking account currently pays 5% interest so I keep a high balance, and I have a cash back credit card.

Common sense would say I should put every recurring expense (gas, groceries, utilities, phone, TV etc.) as well as all routine expenses (clothes for the kids etc.) on the credit card. I get cash back for the charges and my cash stays in my checking account a few more weeks, earning interest.

I don't do that however. I have added more monthly recurring charges to my credit card and now usually charge my gas purchases, but I still resist charging many things, including groceries because I don't want that big bill.

I should charge more and debit less, but I can't get over the fact I would have a $2000 or $3000 credit card bill every month, even though I'm not actually spending any more. Of course that's the point of the article, maybe I would be spending more, but I don't believe I am, and I pay very close attention to expenses. I'm confident that our spending is for things we have to have, or at least plan to have.

[kitty]

"I think many are over-analyzing the study and trying to substitute anecdotal evidence. "
Not necessarily. In math, when you need to prove that a statement/formula works for all members, you need to have a formal proof, it's not enough to substitute a few numbers i.e. show anecdotal evidence. But showing that a statement is false i.e. doesn't hold in all cases requires a single counter-example - you just need to find one example where the formula doesn't work. An anecdotal example is perfectly acceptable when you are showing flaws in the study.

"Even some of those who are paying off their credit card balance every month are still living paycheck to paycheck."
Some people do. Some don't. Does credit card enable more spending? Definitely. Does it mean everyone who uses credit card spends more - certainly not. As to living paycheck to paycheck, using cash doesn't prevent it, does it?

[Todd]

The study has truth. Credit cards allow people to mentally separate from the transaction. It feels less like you are actually spending the money when you use a piece of plastic then if you have to actually pull cash out of your wallet and hand it over. This makes it easier to spend more because you don't really see the money go away right then.

Because credit cards provide many benefits (convenience, cash back, insurance, warranties, etc.) there are many reasons to use them. Credit card companies can provide all these benefits because they know that the majority of people will not manage them well and will end up carrying balances and paying interest and late charges. If you are one of those people you should not use credit cards. If you are managing your money well and living within your budget then you won't spend more merely because you are using plastic.

[David]

But here is another study that eliminates the selection bias issue:

http://www.springerlink.com/content/vv4543514814107h/

[rkudasik]

I'm surprised that in all of that you didn't mention interest or fees. Of course users of credit cards spend more. If not simply on interest alone!

I understand that some people pay off their credit cards before the statement to keep their credit current. That is commendable.

[Mark]

Have you read the book "Blink"? It discusses many examples of things we do without any conscious realization of it, including blatantly racist assumptions that no-one would ever admit to, etc. Simple example: Black students asked to write their race on a math test answer-sheet scored significantly worse than those who were not asked this question.

Also, fat people get paid less than thin, short less than tall, etc. None of these are conscious discrimination - just subtle perceptions that affect how we treat people.

Given these examples, it is entirely possible that using plastic leads to spending more. And it is also entirely possible that those saying "Not me" don't even realize that it includes them. (None of those black students decided to do worse because they had just been reminded that they were black.)

Even if you pay your bill every month, and regardless of whether it is a debit or a credit card, subconsciously the point of payment has been separated from the point of consumption. And it would not be at all surprising if that led to higher consumption.

P.S. The McDonalds statistic is about the difference in average bill when a McDonalds started taking cards, not credit card customers vs. cash customers.

[Jim]

Anybody got a link to the actual Dunn & Bradstreet study??

That seems to be the only source that is cited to argue this point but I can't find the actual study itself. Without knowing how the study was conducted and what they actually looked we're just taking their findings on faith.

Jim

[Kevin]

I actually agree with the D&B study, but I still use a credit card for everything, gladly accept my rewards and know I do not spend any more by using the CC instead of cash.

How is this possible? In every statistic there are outliers at the fringes of the bell curve. Yes, most people may spend more by charging purchases, but some do not. I would be a lot of the people who read this blog are in the same category with me & FMF.

[Colin]

Interesting post! Thanks for coming back to this topic.

It's not entirely clear exactly where the truth lies in this. Probably somewhere in the middle. For some people, using credit cards may cause them to spend more. But for others, it's really just moving spending from cash/debit over to cards.

David's study looked interesting, though I didn't look in detail...

[Tim]

I would argue that the convenience of credit cards alone causes people to spend more. Makes total sense to me. If something is inconvenient (cash), it won't be used as frequently. Therefore, impulse purchases are likely reduced. Seems like a no brainer.

[FMF]

Tim --

Maybe. But when then does inconvenience start to intrude on your life (i.e. you want to buy a meal but can't because you don't have enough cash or you want to fill up your car but only have $10 in cash for gas money)?

[rwh]

At the end of the month I still write a check for my credit card bill. And when I use my debit card I log on to my account and then write the transaction in my check book. So I am fully aware that I'm spending my money.

And yes, I know I'm a dinosaur for continuing to write a few checks each month:)

[Tracee F.]

Hubby & I have a CC we use for gas & groceries. I initially set it up that way for tracking & budgeting purposes. I get paid 2x/mo and pay the CC off every time I get paid (it's a fairly low balance card, and gas has gotten nuts). Other than that, we only use CC for online purchases (for the security) and pay off the charges each month (we're still working on the old balances).

I don't like using debit cards because of the holds and other oddities that have come up that have caused issues with our checking balance.

The only problem we've really had with it is that it *is* easy to grab the gas/groc CC when we're out to dinner or grabbing a quick bite at a fast food joint and can't easily check our checking balance. Then we forget about it until it's time for me to pay the cards when my paycheck hits. We've not NOT been able to pay off the "working" card, but our budget looks like hell.

Oh and all our recurring bills (utilities, mortgage, etc.) are all done automatically with e-bill through our bank, or another auto-pay system.

[Adam]

I actually find that I spend more when I have cash on hand. I usually do not use the cash for large purchases, but the small ones. If I go by a convenience store or a vending machine, I always say to myself, 'why not, I have some ones in my wallet'. It never seems to fail me that if I have a $20 in my pocket, it will be gone within a few days and I will have no idea where it went.

[Mama Sweet]

When I get cash - via ATM or someone paying me back, I usually spend that much faster than I would if using a card. Why? That money's already been spent. It's already deducted from my account, so it now has less value to me. When I use the card, I think about how it will affect my balance - do I need this item since bills are coming due? Do I really need to charge $2.00 to my card - since It could potentially be held on my bank account for a few days or incur interest if I miss a cc payment.

[Tim]

FMF wrote:
Tim -
Maybe. But when then does inconvenience start to intrude on your life (i.e. you want to buy a meal but can't because you don't have enough cash or you want to fill up your car but only have $10 in cash for gas money)?

That's why I use a credit card :-)

[LotharBot]

Does "people spend more with credit cards" mean:

1) the same person will spend more if they use a card, or
2) people who have credit cards outspend people who don't, or
3) something different?

It really, really matters which of these it is.

[Todd]

Someone may have made this point, but I'd also add that the salient issue regarding credit cards is whether those with financial discipline (e.g., FMF) spend more when using a credit card. I seriously doubt it.

In fact, my personal experience is that I don't spend any more money using credit cards than I do paying cash. I just don't like carrying large amounts of cash with me. But my spending is the same with both, and because of my use of a cash back card I often charge it instead of paying cash for it even when I have plenty of jack with me.

[LAL]

FMF, where is the study? I have heard and heard and heard this FAMOUS study preached but I've never found it posted on the internet. I've looked in a lot of university libraries and never found it either. I can't seem to find where it was done. FWIW, I am a student at a university and can't find it.

Also people who overspend with CC are obviously bad with mony. They obviously spend more with CASH TOO!

I wrote about it where people are getting serious overdraft fees because they can't balance a checking account? They are overspending CASH! For gods sakes!

[Kris]

I love how all the poor people come on here and say how its all OK to use Credit Cards and sit here and say a $20 dinner is a "big purchase" that you feel more comfortable using a credit card for. The simple truth is, you DO spend more using credit cards because you don't have to sit there and budget. You make impulse buying decisions ( even the most disciplined person does this ) and don't think about what you spend until the bill comes. Even if you pay your bill off at the end of each month, you still have minimum finance charges you to pay. Back when I had credit cards, I had one company that would go 3 or 4 months with the same due date, then all of a sudden the due date was a week earlier, no doubt they were trying to get me to miss a payment. My financial situation is 1,000 times better since I got rid of all credit cards, I carry cash and I have my debit card if I need to make a "big purchase" ( which I define as far greater than a $20 dinner LOL ) You aren't going to get rich off of airline miles, 2% cash back awards and other garbage that the CC companies try to make you believe.

[Sally]

What about debit card vs cash? Since I've become more aware of my finances, and made a commitment to keeping my checkbook current, I find it's cash that seems less "real." Using cash in my wallet won't reduce that magic account number. It won't cause overdraft fees. It's like it doesn't count, so I spend it like water.

Also, despite the fact that cash if physical, it's harder to keep track of my balance. When I vacation and carry a couple hundred in cash, I don't have a good sense of how much I have unless I make an effort to count every bill after every purchase. (It's dangerous to "flash your cash" and inconvenient to stop and count.) Suddenly I find myself wondering where it went. It's easier for me to make estimates off neat numbers on receipts.

[steve]

I believe a more useful distinction would be between buying on credit, and not buying on credit. If you have the cash on hand or in your bank account, and use the credit card simply as a means of purchase as opposed to using its credit facilities to purchase more than you can afford at that time, then I think there is probably little difference between using a credit card and using cash from the point of indebtedness. If you are using the credit card because you actually are short on cash (on hand and in the bank)and just wouldn't be able to swing the purchase otherwise than as a credit card transaction, you are specifically using the credit facility of your credit card. That is a different matter as it means you are becoming actually, not just nominally, indebted to the credit card issuer.

It seems worth saying that for the latter category of credit card user, they may not have a handle on their actual financial means, and as a result their usage of credit cards results in indebtedness and overspending.

[No Debt Plan]

My personal stance is that if I am staying within the bounds of my budget, and I treat my credit card like a debit card, what's the difference?

Ramsey gets a lot of things right, but credit is not one of them.

[JMO]

I buy everything on a credit card and pay it off several times a month. I don't pay finance charges or carry a balance. I'm not going to "get rich off of airline miles", certainly, but it beats having to pay for a round-trip flight to Honolulu once or twice a year to visit my family.

As far as impulse buying? Having tried both the cash-only thing and the credit-only thing, I've found that I'm far more likely to buy frivolous things if I'm using cash. Why? Because what I bought won't show up on my credit card statement. If I buy something stupid on credit, I know I'll have to explain the purchase to myself later. If I buy something stupid with cash, on the other hand, all I know is that the money went "somewhere" and is now gone. Because of this, I try to limit cash purchases to things under $10 or so. If I'm spending double digits or greater on something, I want to know exactly where that money went.