Why Credit Cards are Dangerous (It's Because They Feel Good)
Soon the paper check might have competition for the title of most outmoded payment method—the dollar bill. Why? Because credit cards are so popular.
We're paying with cash less and less—fewer than a third of purchases in the U.S. were made with cash in 2015, compared to 59 percent credit, debit and electronic payments. (Surprisingly, cash is most popular with young adults ages 18 to 24. Thirty-eight percent of them said they prefer using it to pay for stuff over other methods.)
Charge more, spend more
But relying on plastic could also be a dangerous game, several research studies have found. When we use our credit cards to pay for something, especially if it's a big ticket item, it hurts us a lot less. Avoiding the "pain of paying," as behavioral psychologists call it, can get us into money trouble.
Research since the 1970s has showed how using credit cards can skew our view of spending: A 1979 study indicated that people who own more credit cards spend more during department store visits; a 1986 study suggested people leave bigger tips when paying with cards; in 1999 researchers discovered that people who use cards are more likely to actually forget how much they spent on things.
Another study showed that just decorating a space with credit card paraphernalia was enough to get subjects inside to say they'd pay 50 to 200 percent more for something than subjects who were questioned in a room without credit cards lying around.
The point is, credit cards have a weirdly strong psychological effect on us. A study by Drazen Prelec and Duncan Simester from the Massachusetts Institute of Technology's Sloan School of Management took it one step further and compared the effect of access to cash and credit cards on spending. They asked students to bid on tickets to a Boston Celtics basketball game. One group was told they would have to pay with cash, and the other was told they would have to pay with a credit card. The researchers found that the students who were told they had to pay with a card bid an average of two times the amount the cash group bid.
"Why does cash feel so different?" said Duke University behavioral economics professor Dan Ariely during a talk on the pain of paying. "The agony of parting with our money has do do with the saliency of, do we see this money going away? And it has to do with the timing of whether the money is going away at the same time we're consuming."
In other words, it's more emotional for us to part with actual, physical money. Sometimes we want to be sheltered from that feeling—while we're on vacation, for example. But the dulling effect paying with a credit card has on us can cause us to lose touch with our spending and go over budget. Here's how you can increase your pain of paying and make sure you're keeping to your budget, according to Ariely:
1. Use cash, or at least a debit card
Get in the habit of taking out cash and budgeting the right amount for you for each day. Take only that cash with you when you leave home. You won't be able to overspend.
"Let me switch from credit cards that disassociate consumption from the timing of the payment to cash, or if I can't go all the way to cash, maybe I'll go to debit cards which give you some sense of paying in the moment," Ariely said.
2. Set up automatic notifications through your bank
Through your credit card company or your bank, turn on text or email notifications to alert you when you make a purchase with your credit or debit card. You'll be very aware of how much debt you're racking up or how much you're taking out of your bank account.
3. Be mindful of the regular purchases you make
Ariely made the comparison of spending on electricity for your home to spending on gas for your car. Unless you're running outside to check the meter regularly, you're probably pretty unaware of how much electricity you're consuming. And you probably don't pay much attention when you pay the bill each month. But what if you thought of it more like paying for gas—as you fill up your tank, the money you owe ticks up right before your eyes. Treating other regular expenses like this can make you a lot more mindful of how much you're consuming and the bills you'll need to pay, Ariely said.