There are several studies that conclude that people who use a card spend more than those who pay everything in cash. I find this fascinating because it illustrates how sometimes tools that are designed to make our lives easier – and do so in certain ways – can also complicate us in others.
As many of my readers know, I particularly use my credit card for everything. I always pay the full balance but also, unlike many totaleros, I don’t live a month behind (I’ll explain this in more detail in the next column). This works for me because I have good control of my money through my spending plan. Thats the secret.
Getting back to today’s topic, there are two main reasons why people spend more when they pay with a card.
The first has to do with our feelings and sensations. When we give cash, we have to take it out of our pocket and give it to someone else (the person who collects us). That generates a sense of detachment: money is literally slipping out of our hands. It is a very alive and powerful feeling.
Psychologists call it “linking” (in English is “coupling”). The experience of consuming something is directly linked to the experience of paying for that consumption. For example: if we invite the whole family to eat at a restaurant and the bill is several thousand pesos, if we pay in cash we feel a sensation of “pain” for the amount we have to pay. It is intense and it is immediate. But it is also linked to the pleasure we feel from sharing with our loved ones, because it is experienced almost simultaneously.
We do not feel this when we pay with our card. We are not letting go of anything. We simply insert or bring the plastic closer and type our electronic signature. Money is much more abstract. There is no such “linkage”.
The second reason is directly a consequence of the first. By decoupling the feeling of payment from the pleasure we feel when buying, consumers tend to overestimate the benefits of that purchase. That is to say: untying makes consumers evaluate the benefits, without taking into consideration the costs.
For example: we only have 1,000 pesos to go to dinner at a good restaurant with our partner, to celebrate our anniversary. On such an occasion, we cannot run the risk that when the bill arrives it will not reach us. But neither do we want the other to feel limited.
In that case, we would probably try to limit our own consumption. Or we would look to share an appetizer and dessert.
But if we have a credit card, which we know we can use, our behavior changes. Even knowing what our budget is, we would not have too much concern and we would concentrate more on enjoying the evening.
Maybe the bill reaches us double what we could spend. Even so, we will say: “at least it was worth it”. In other words, we are focusing on the benefits without considering the cost. We might even be overestimating them.
In the end, paying with a card is much easier than doing it with cash. When it is credit, even more so because we do not need to have the money in our account, to make use of it. If we are not careful we can easily lose control.
Of course, paying by card has its benefits. The most important: it is much safer than carrying bills and coins. But like any tool, you have to use them carefully.
