Study: Credit cards don't increase spending

Paying with credit cards instead of cash may in fact not cause consumers to spend more, according to a new study from Carnegie Mellon University. The study goes against current popular theory that people who buy with plastic tend to spend more than cash customers.

Economists Elif Incekara Hafalir and George Loewenstein of Carnegie Mellon University, however, determined there was no significant difference between the spending amounts of credit card and cash users by conducting a controlled field experiment. The study was performed among over 400 respondents in the cafeteria of a large insurance company, where the economists found cash consumers spent an average of $4.59 on lunch, while credit card users spent only 34 cents more ($4.93).

The study divided cash users into two different types of credit card users: those who normally paid with cash but were given a card to pay with before the experiment -- referred to as "revolvers" -- and those who already regularly used credit cards, called "convenience users." While the revolvers spent less when induced to use a credit card, convenience users spent more during the experiment, indicating that credit card users may only spend more when they had become comfortable paying with their cards.

The study contradicts earlier research on the topic, including a four-part study published in September 2008 by the American Psychological Association (APA), in which researchers found people were willing to spend more when they used a credit card instead of using cash. "The studies suggest that less transparent payment forms tend to be treated like [play] money and are hence more easily spent (or parted with)," the researchers said. In the APA study, credit cards were said to be one of the least transparent forms of currency, while cash was the most transparent and where consumers were most likely to feel the "pain of paying."

A famous experiment conducted by Drazen Prelec and Duncan Simester, marketing professors at the Massachusetts Institute of Technology, also declared that consumers using credit cards devalued money. In their study, the researchers created an auction for tickets to a Boston Celtics game, informing half the bidders that the winner would have to pay in cash, and the other half that the winner would have to pay by credit card. They found the average credit card bid was roughly twice as large as the cash bids, indicating to the researchers than plastic spurred consumers to become spendthrifts.

Critics since have said that it is not a credit card that makes a consumer spend more, but rather the affluence that allowed them to get a card in the first place. "It isn't as if carrying a credit card made a well-heeled woman buy a fancy new outfit at Neiman's," said David Evans, co-author of "Catalyst Code" -- a book about business models. "Being well-heeled is the reason that woman was able to get and carry an AmEx card, or a Neiman's card." In his blog, Evans said he expects further experiments on the subject of credit card spending.

See related: U.S. spending and credit offers decrease in wake of economy, Credit card spending slows, Credit card addiction: how to break the spending cycle

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Updated: 07-16-2018