Do We Spend More With Credit Cards? A Study Proves … Maybe

by Joe Plemon on July 12, 2010

Do people really spend more with credit cards than with cash? This topic has been beaten until blue and there seems to be no documented study which proves one way or another. Yes, many of us have heard of the Dunn and Bradstreet study (oft quoted by Dave Ramsey) that indicates people spend 12-18% more when using credit cards, but evidently, according to Money Myths and the Importance of Thinking for Yourself at Get Rich Slowly, that study hasn’t exactly ever happened.

Another research project indicates people do spend more with credit cards

A published study by researchers at Carnegie Mellon, Stanford and MIT, indicates that people  “spend money ’til it hurts”.   The study appears in the journal “Neuron” and is the most recent from the emerging field of neuroeconomics, which looks at the mental processes that drive economic decision-making.

However, before any of you credit card advocates start overdosing on your blood pressure medications, let me quickly assert that this study DID  NOT prove that people spend more with credit cards than with cash; it only gives credence to the theory.

Credit cards effectively anesthetize the pain of paying,” said George Loewenstein, Carnegie Mellon professor of social and decision sciences (SDS) and co-author of the paper. “You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”

OK.  How exactly did the study work?

Remember that these people are, uh, brainy.

In the study, 26 adults were each given $20 to spend on a series of products that would be shipped to them. If they made no purchases, they would be able to keep the money.   The participants viewed the products while lying in a functional magnetic resonance imaging (fMRI) scanner while the researchers studied which regions of the brain activated during each participant’s decision-making process.

With the study participants all wired up, the researchers goal was to learn if their brains would register pain when they saw higher prices.  Guess what?  They did.

An electric moment

We were so excited when we got the results from the first scans, and saw that the insula, a section of the brain associated with pain processing, activated when subjects saw prices that were too high,” said Loewenstein. “It was an electric moment.

Scott Rick, the SDS graduate student who worked with Lowenstein on the project, was especially excited when they found that insula activation discouraged spending.

It suggests that prices do not deter spending purely through thoughts of foregone pleasures, as assumed by standard economic theory, but also through immediate pain,” added Rick.

Restated in my words: “The findings indicate that people decide not to buy because they intrinsically know the purchase. while giving some pleasure, will also cause pain.  When the fear of pain overrides the anticipation of pleasure, people decide not to buy. ”

Loewenstein and Rick, along with Cynthia Cryder, also a graduate student in SDS, are continuing their research on the “pain of paying” — the pain one experiences when paying for purchases.

My thoughts

Far be it from me to second guess brainy researchers, but I think they overstated the results of the study.  While giving strong credence that the brain does register pain when prices are too high, Loewenstein took a leap in logic when he said that the study explains why people spend more with credit cards (less pain than cash).  The problem is that he never actually tested the pain using credit cards versus cash; he only proved there is more pain when prices go up.    I wish the researchers, while they had these 26 adults’ brains all wired up up, would have required them to pay cash and then swipe plastic for the same value purpose.  At least we might have been able to have learned if the credit card pain theory was valid.

In the meantime, I suppose we will have to wait for another study to actually prove whether people spend more with credit cards than with cash.

How about you?  Do you personally spend more using credit cards than using cash?  How do you know?


{ 13 comments… read them below or add one }

Craig Ford July 12, 2010 at 3:20 pm

I’ve done my own study. It’s called moving to a third world country where they don’t use credit cards so I pay cash only. I think I do spend less using cash, but has nothing to do with the emotion of using cash. In fact, I’ve been surprised at how much money feel like Monopoly money – I just don’t feel much when I spend it. However, when I get somewhere without money I don’t always go back and buy it. That saves money.

Still, the discussion just begins with the question – which is cheaper? It eventually evolves to the question is the extra cost worth the convenience of credit cards?


James July 12, 2010 at 3:52 pm

i know for a fact when i am spending cash and it is gone i feel the pain of having nothing.

if and when i use my credit card i still feel the pain of a big purchase but not as much as i do with cash.

the act of money leaving my hands is tough enough.


joeplemon July 13, 2010 at 10:43 am

Your study is quite dramatic. Do you think we could round up a “study group” of volunteers to either verify or disprove your results? 🙂

I have no objective way of saying that I spend less when using cash. Cash may bring on slightly more pain, but I am aware of what I am doing when I use plastic (debit card), so the pain difference is minimal.

The big difference for me is the use of cash envelopes for many of our budget items. When the cash is gone, we are through spending in that category until next month. With plastic, our spending is not so clearly defined.


Financial bondage July 15, 2010 at 8:18 pm

12-15 percent more or something like that… according to the man.. Dave Ramsey. It makes sense, when using plastic, it does not feel like we are spending real money, so it’s easy to grab one of everything in the store…. and not think about it much… until that months bill arrives in the mail. Then you have that OMG moment. lol


joeplemon July 16, 2010 at 7:02 am

Dave makes that claim based on the Dunn and Bradstreet study I alluded to in the first paragraph of this post. However (see my link in the first paragraph), this study evidently has never happened.

As a DR certified counselor, I notified his organization that the study had never occurred and challenged Dave to quit quoting it and apologize for using a non-existent study to prove his points. The told me they would look into it, but I haven’t heard anything else.


Gholmes July 20, 2010 at 1:46 pm

Yes I do spend more and I have made the choice not to have one.

When I carried one in my wallet I had easy access to money with credit limits of $10,000+.

Example why I prefer using cash. (I am the nerd wife is fun one)
So day out with family with credit cards: Didn’t have to plan the $$$ part, just went and did fun things. Discussed usually at month at “wow” did you know we spent $x.xx.

Same day out with family but with cash: Wife and I are forced to discuss the $x.xx before hand so we can have money with us.

Wife is more spontaneous than I so we usually adjust our monthly budgets during the month but we are really progressing towards our goals. Using cash I have learned to be more flexible and she has learned to speak my language so we dont have those “wow” moments at the end of the month.


joeplemon July 20, 2010 at 2:01 pm

I suspect that your two scenarios (a day out with the credit card vs a day out with cash) are more typical than most people realize or admit. I think it is great that you and your wife understand each other and are learning to speak each other’s languages. Good communication is critical for a good marriage.

I realize that you no longer own a credit card (I don’t either) but let me ask: did you experience more “pain” when cash than when using a credit card?


Gholmes July 20, 2010 at 2:30 pm

Not sure if “pain” is right vocab fore me.

It is easier for me to spend a $5 or $10 bill than breaking a $20 or harder yet breaking a $100/$50. I have passed up buying gum because all I had on me was a $20 and didn’t want to break it.

So I suppose swiping a credit card is easier yet to spend, especially if someone has attached a reward rebate to it. Not sure I would use cr card to buy a 1.25 pack of gum. The pain of a credit card was month end.


joeplemon July 20, 2010 at 4:11 pm

Even though you don’t associate much pain with spending cash, you said something significant: “the pain of a credit card was month end”… meaning credit cards cause delayed pain, after the purchases have been made. I suppose if credit card users could learn to somehow remember that end of month feeling BEFORE making a purchase, they could better control their spending.

In the end, simply forming a budget and sticking to it should dictate all spending, whether it is with cash or credit card.


novatedlease calculator July 23, 2010 at 6:29 pm

In reality, credit cards are seen to be a financial devise that gives a lot of benefit because of the convenience that it offers. Users may be bound to the joy of shopping with it without realizing the after effect and the expense of it.


Mary August 10, 2010 at 11:34 am

Majority of us lack the knowlege required on dealing with credit cards. People acquire credit cards to help them when they are caught up with cash emergencies, but we get tempted and see a credit card as money in our pockets.


michael at creditcards October 15, 2010 at 7:27 am

Credit cards can be man’s best friend and worst enemy too, depending on how are you going to treat your credit cards, if we are going to be its friend, automatically we will not abuse what this friend can give us but rather take care of them so you will not create a fight. It is also best to have a list of your purchases and review it every time before buying another one.


RobS October 2, 2011 at 6:18 am

To what extent it’s hard to say, but yes, I believe people do spend more with credit cards. With cash, someone can only spend that amount of cash. They can spend their balance to zero. Credit cards give you the ability to go into debt — in essence, to spend the balance to a negative position.

Looking around it’s not hard to find people carrying credit card balances on a regular basis. They could have never done this with cash — so they obviously overspent with the card.

Just the mechanics of it all…


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