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Spend More With Plastic?

I recall a few years ago a bit of news came out that linked coffee with cancer. As a student of the scientific method, I immediately asked one question. Is this a false correlation? I have to say I nailed that one. A few months later, the claim was withdrawn. It turns out the population of coffee drinkers contains a higher percentage of smokers than non drinkers. This statistical difference was high enough that it was easy to understand (and predict) the conclusion that followed. Once this occurred to the researchers, it followed that they acknowledged their error and withdrew their anti-coffee remarks.
Another correlation – TV makes you fat. No doubt there are the proverbial couch potatoes who sit in front of the tube, drink soda, and eat snacks. Yet, TV has the opposite effect on me. I try to run 20 miles a week, all of which are on a treadmill, with a TV propped in front. I tried reading and that was a mistake. Books on tape? Great in the car, but on the treadmill, not so much. TV takes just enough of my attention so I can follow the story and keep a good pace. So, for me, another bad correlation.

What does all this have to do with credit card spending? Turns out, plenty. Studies show that people spend 12-18% more when using credit cards than when they spend with cash. I’ve read this and even though I’ve never seen any raw data to back it up or any details of the study, I’ll concede it may be true. But what is the cause and what is the effect? I’ll ignore the reasons to use cards, the rebates, extra warranty, etc, and instead focus on the claim itself. I charge all my gas purchases. Would I buy less gas if I paid cash? Groceries? I’ll be the first to admit I can spend $100 more at Costco than I plan, but is that money wasted or well spent? I’ll come home with the start of quite a few meals. The pack of baby back ribs for the BBQ, the shrimp that are just about half the price at my local supermarket, you get the idea. How is the spending an issue just because it wasn’t planned? Do these studies differentiate between spending on say, magazines, candy bars, and gum vs food that becomes a meal? If I buy bathroom tissue or Kleenex on sale saving both money and the gas of an extra supermarket visit, how does that purchase get characterized? If the unplanned purchases are truly wasteful wouldn’t I be throwing food away? If not, then what is the consequence of the spending more on the cards? If not gas, not food, then maybe clothes? I actually don’t remember the last clothing purchase I made for myself. My daughter, however, is still growing, so new sneakers and shoes every year. New clothes for her before school starts every September as well. But again, I can choose between going around with a wad of cash or just sticking to the cards. If you have a moral objection to credit card use, I understand, but if not, I think the idea of cards causing to to spend more is more hype than reality.

What do you think? Are you tempted by the plastic?


  • MoneyCone April 28, 2010, 9:15 am

    I actually did this experiment a long time back. Went a month without using my cc (except for online payments like utilities, cable, phone bills etc). Even though at the time of spending with cash I never felt I was holding back, at the end of the month what I spent was less than my average. I can’t explain it, but I think it probably is true – you do spend more with plastic than with ‘paper’! 🙂

  • Guy G. April 28, 2010, 10:49 pm

    I’m not sure how, but this post reminded me of Scrooge McDuck swimming in his money vault. I think because I though that I love counting money, just not when I’m in the process of giving it to a cashier. It seems so much more painful than handing him/her a inert piece of plastic that I hate anyway. There’s no psychological attachment to VISA’s or MC’s money when I spend it, but when it’s mine… OUCH!
    I think this is the way many people feel, and that’s why good tips on budgeting like yours always try to educate that you should spend with cash whenever possible because you’ll trick yourself into more frugal shopping.

    Thanks for the post,

  • Joe Plemon April 30, 2010, 6:31 am

    I, like you, would like to see the data from which these conclusions (spending 12%-18% more with plastic than cash) were derived.

    I would say that some people spend more with plastic and some spend more with cash (it “burns a hole in their pocket”).

    Because we put cash in envelopes each month, we know there is a limit to what we can spend on anything. When the envelope is empty, we are done. That is not true with plastic; it can become more open ended and we could possibly spend more for that reason.

    In the end, controlling one’s spending is up to that person, be it cash or credit.

    Good, thought provoking post. Well done!

  • JOE April 30, 2010, 7:00 am

    I haven’t paid interest on a credit card in decades. We only spend what we can pay in full when that bill comes in. Still we agree – “show me the data.”

  • Joe Plemon April 30, 2010, 2:08 pm

    Have you read this: http://www.getrichslowly.org/blog/2010/04/27/money-myths-and-the-importance-of-thinking-for-yourself/
    It is written by J.D. Roth at Get Rich Slowly.

    Evidently, the Dunn and Bradstreet study never happened. No wonder we can’t find the data. It isn’t there!

  • JOE April 30, 2010, 2:29 pm

    Wow. I’d not seen JD’s article yet. It doesn’t surprise me, though. It leads to other studies that are too contrived for me to put much faith in. I think the issue can be studied if there were a willing sponsor for such a study. I think it would require a fair number of people participating and complete transparency on all spending for a good 6-9 months. I suspect that once you remove false correlations, you’ll find that, indeed, those who are already floating debt month to month are going to spend less if they move to cash. The pay-in full people, I expect little difference. Craig Ford studied his own spending and found so little of the spending to be discretionary that the rewards on the fixed spending would cover it. His post is at http://www.moneyhelpforchristians.com/credit-cards-vs-cash-spend-more/

  • Jason @ Redeeming Riches May 1, 2010, 7:42 pm

    Great post Joe! I too have to question the claims of a lot of these studies. We are one of those cc users that never carry a balance etc, do we spend more using plastic? I don’t think so – we’ve got a pretty good budget that we try to stick to, so I don’t think it’s been an issue.

  • Wiseguy May 2, 2010, 3:01 pm

    I, too, do not believe that I spend more with credit cards than with cash. Actually, I save money using credit cards, but we’ll save “cash back” for another discussion.

    In response to the original question of paying more with plastic, it depends on the person. Some people have a personality that is equally frugal regardless of payment method. Other people have an extreme “out of sight, out of mind” mentality and won’t think twice about charging extra items, simply because they don’t need to worry about paying right now.

    Also, I don’t often trust statistics because people don’t know how to use them. What if there’s a misinterpretation due to poor wording? For example, there’s a big difference between:
    “People spend 12-18% more with credit cards.”
    “12-18% of people spend more with credit cards.”

  • Kevin@OutOfYourRut May 2, 2010, 8:14 pm

    OK, contrary opinion. While confessing that I haven’t seen any study to support it, I nonetheless believe there is a definite connection between the amount of spending and the method of payment used.

    I’m basing this on my years of experience in the lending industry. We can say all we want that “I don’t spend any more with cc’s than with cash”, but that isn’t empirical either. People with an interest in PF blogs generally tend to be more conservative in general, so we’re no barometer of what the masses are doing. I saw first hand what the masses are doing.

    Second, I think we tend to view cash or savings as our money and most will be more conservative with “our money”. CC’s represent OPM, other peoples money. All you need to do is look at the number of people walking on their mortgages to know that we aren’t as bonded with OPM as we are with our own money. How many people walk away on houses where they have equity–a.k.a. our money???

    CCs are a fudge, a level of extra margin, and most people lack the discipline to resist the temptation to tap into that margin. The CC companies have built an entire industry on this.

  • JOE May 2, 2010, 8:21 pm

    Your comment makes perfect sense. I still think the references to studies that don’t exist are a bit over the top. An actual study, if one would fund it, would interest me.

  • Kevin@OutOfYourRut May 3, 2010, 5:35 am

    Maybe a study hasn’t been conducted because it isn’t practical. The only way to truly test the theory would be thru side-by-side comparison tests where you match the results of the subject spending with CCs, then rewind the exact same shopping trip without–but there’s no way to do that since no two shopping trips are ever the same.

    Alternative would be to monitor spending by the same subject over several months with CCs then severral months without. But even there, I don’t think there’d be sufficient control of the variables to produce credible findings.

    Would be interesting though!

  • JOE May 3, 2010, 7:15 am

    Even a couple months wouldn’t cut it. Again, I agree that such a study would be difficult to create. There’s the “white coat effect” (often incorrectly called the Heisenberg principal) which inplies that the very nature of being studied creates a change in behavior. In this case a proper study would have to claim to be looking at something completely different, say, some aspect of nutrition or similar. And then find a way to have them shop without the cards, but not make it obvious that that’s the variable being studied.

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