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Cash or cards this Christmas?

by Peter Andrew
Cash or cards this Christmas?

Does plastic rot your brain? No, this isn’t another of those food packaging scares that regularly make the rounds on social media. The plastic in this case is of the credit card variety, and the question relates to whether using a card rather than cash affects how much you spend. Some believe that simply using plastic for transactions makes us spend more, because it changes how our brains work — or, at least, how we think — when we’re making purchases. However, their case is far from conclusive.

Credit cards and spending

A couple of years ago, IndexCreditCards.com reviewed some of the academic research that’s tried to explore the supposed link between credit card use and greater spending. It’s undeniable that a number of studies suggest such a link, and at least one (“Do Payment Mechanisms Change the Way Consumers Perceive Products?” from the Journal of Consumer Research) found that people who made purchases using plastic might tend to focus more on a product’s benefits, while those paying cash tend to focus more on its cost.

However, the problem with many of these studies was highlighted in another paper, published in 2009 by researchers at Carnegie Mellon University: It’s easy to show a correlation between card use and higher spending, but much harder to demonstrate causation.

Correlation and causation

In other words, it may be that the sorts of people who use plastic are the sorts of people who tend to spend more. They prioritize benefits over costs because that’s who they are, regardless of their payment methods. After all, it would be no surprise if consumers who are more affluent than average — and those in this group have all been approved for credit cards, so the least well off are excluded — take into consideration more than just the ticket price when selecting goods and services. They might easily be more swayed than poorer people by features, performance, quality, design, prestige, potential longevity and so on.

Indeed, the main conclusion in this paper was, “Surprisingly, we find that credit cards do not increase spending.”

And yet…

One person who seems to buy (no doubt paying cash) the card-users-pay-more theory is Ron Lieber.

“The biggest threat to our financial lives is probably not that thieves will get their hands on our payment card information,” he wrote in an October New York Times article. “Instead, we should concern ourselves with the way we quietly chip away at our own net worth by using credit cards too much in the first place.”

And it may well be that, in spite of the Carnegie Mellon findings, some are influenced by their payment method. But Lieber had a great idea. He got in touch with a number of the academics who had written those papers that suggest a link to ask them whether now, years later, they still avoid credit cards. And not one of them does. Yep, they are all today charging away.

Rewards credit cards irresistible

You might see this as typical academic arrogance: “You stupid people should do as I say, but I’m much too clever to have to follow my own advice.” But that seems way too harsh. Maybe, given their awareness of how cards work, they just feel able to make more conscious purchasing decisions by actively interrogating themselves about their motivations when evaluating the things they buy. If that’s the case, you can do the same. After all, you’ve read this article, and have a grasp of the theories in play.

Most of the academics Lieber interviewed share the same motivation for using plastic: They aren’t prepared to forgo the miles, points or cash back their rewards credit cards are giving them. But, if they’re half as smart and knowledgeable as they like to think, they’re also going to appreciate the valuable perks, protections and other hidden benefits that many cards provide.

Know yourself

Of course, there are plenty of consumers who find plastic seductive, and whose purchasing decisions are less rational when they’re using it rather than cash. Some can’t resist the temptations of a big line of credit and spend too freely, quickly maxing out every card they ever have. Others may, as most of the studies suggest, find it harder to objectively judge individual goods and services they’re considering buying.

But the fact some struggle in these ways shouldn’t put off those who aren’t so seduced. If you’re a good money manager, and you avoid using credit cards for your holiday shopping and travel this year, you’re likely cutting off your nose to spite your face. Even the most ivory tower-bound academics know that.

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