Do Credit Cards Increase Your Spending?

2010 February 25
by Kyle Bumpus
from → Credit And Debt

As I’ve stated before, I am a regular over at the Bogleheads forum, and often a debate will break out on a topic that catches my eye.  One recent thread that particularly interested me was on the topic of whether or not using credit cards increases your spending.  That is, does the average person spend more as a result of having a credit card than they would by going cash-only.  Naturally, for some people, many people, it works.  I was somewhat surprised, however, to witness the vehemence of many of the forum members who denied that having a credit card had any effect on their spending.

Of course, nobody would argue that every person with a credit card spends more than they otherwise would;  obviously, some people spend the same and still others probably spend less, as there are plenty of responsible credit users out there.  But one of the things that makes the use of credit cards so insidious is that the mechanism that triggers increased spending is completely subconscious in most cases;  that is, most victims of this phenomenon would probably be completely unaware they were spending more.  One thing we do know is that it works, at least in general.  That’s how stores were persuaded it was in their best interests to accept credit cards to begin with:  the average customer will spend more on credit.  This is empirical fact.

There are two primary (well-documented) psychological phenomena I think relevant here:  mental accounting and the wealth effect.

Mental Accounting

Mental accounting is the process whereby consumers organize and evaluate economic outcomes.  Simply put, people frame an asset (cash, credit, etc) as belonging either to current income, current wealth, or future wealth/income.  Cash obvious falls into the current income/current wealth category.  Credit, then, should fall into the future wealth/income category.  After all, when you buy something on credit it’s your future wealth that suffers, not your current income.

It should come as no surprise that people value current wealth over future wealth.  A bird in the hand, as they say…  The problem is that people don’t seem to take the time value of money into account when making such decisions, nor the future required interest payments owed on the debt (if not paid off in full, of course).  Spending cash feels different to us because we are reducing our current well-being (wealth).  A credit card transaction, on the other hand, feels a bit different.  We know we are reducing our current wealth, but we discount that knowledge somewhat since the pain comes further down the line.  The harm to your well-being is nebulous, so you don’t take it as seriously.  This is true even for consumers who pay their credit card balance in full every month, albeit to a much smaller extent.

Everybody is susceptible to mental accounting, you and I included.  I wonder how many people who claim using credit doesn’t increase their spending have actually measured it.  I would suspect at least a few of them would be surprised.

The Wealth Effect

The wealth effect is well-known to most people.  When times are good (stock market or real estate boom), people tend to spend more because they perceive themselves as being wealthier.  Simply put, bull markets put people in a good mood because they are optimistic about the future.  Similarly, people tend to spend less in a bear market, at any given level of wealth, because they aren’t as optimistic about the economy.  This is true from the poor all the way up to the super rich to varying degrees.

Credit endows a person with a mild form of wealth effect in that it increases their purchasing power and thus their perceived wealth.  Being able to buy on credit doesn’t actually increase anybody’s wealth, of course;  in fact, it just might decrease wealth if used unwisely.  But most people equate more purchasing power with more wealth.  If you have $20 in your pocket and no credit card, you can only spend $20, no more.  If you have a credit card in your wallet, you could potentially spend thousands of dollars at the swipe of a card.  That kind of power makes people feel slightly richer than they are, and thus spend slightly more.

If you’d like to read more about why people make some of the decisions they do, I highly, highly recommend Robert Cialdini’s Influence: The Psychology of Persuasion.  Chances are, you’ve fallen for pretty much every trick in this book at one time or another.  I know I have.

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4 Responses
  1. 2010 February 25
    K at Greenshield permalink

    Interesting topic. I’ve always personally found the opposite, that when I have more cash in my wallet I tend to spend more. It’s easier to run out and grab something on impulse. I would suspect that this is different for each person, however.

  2. 2010 February 25

    I find repeating the mantra “credit is cash” helps shatter the wealth effect and remind me that I really only have what I have in my bank account available to me at that moment, and anything else is only a potential of the future. ;-)

  3. 2010 March 4
    Jenna permalink

    There is evidence that shows consumers spend 18% more on average when using a credit card which more than negates the rewards earned on credit cards. Many are beginning to realize this and in response consumers are switching to debit. It is possible to find a debit account with comparable rewards on purchases without the increase in propensity to spend.

    Look for a debit card that offers you 1% cash back. If you`re interested, go to to find out more about this.

    Jenna Walker
    PerkStreet Financial

  4. 2011 June 18

    Yes, I do believe that’s true. Having a credit card just pushes us to keep spending(me at least).

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