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The psychology of cash and credit


Although the concept of credit has been around for thousands of years (the Latin word, credere, means ‘to believe’), legend tells us that the first credit card appeared in 1949 when Frank McNamara, head of the Hamilton Credit Corporation, went out to eat with Alfred Bloomingdale. 

At the end of the meal they realised that no one in their group had any cash, so McNamara had to call his wife to bring cash to pay for the meal. It was then that he had the idea for a card that could be used at multiple merchants. 

While charge cards for individual merchants had existed for some time, the idea of a card that could be used to buy products in more than one place was novel. Diners Club, the first multiple merchant charge/credit card was born, and by the end of the ‘50s more than 20,000 credit cards were in use by consumers.

In 2013, the Reserve Bank estimated that there were 15.41 million credit card accounts in Australia, with a total outstanding balance of $49.19 billion, and the average card had a credit balance of $3,198. Collectively, we Australians are paying interest on a balance of $35.28 billion—that’s almost three-quarters of the country’s total credit card balance. Convenience is costly.

Although debit cards have been in Australia since the early 1980s, their alliance with Visa and Mastercard a decade ago has led to an substantial increase in the number of debit cards in the market. Now with the advent of proximity technology in cards, and near field communication (NFC) technology in telephones making life more and more streamlined, it seems we can’t get enough of the convenience that comes with not carrying cash.

Ouch, that hurts

Since the late 1990s, researchers have been interested in understanding the psychology of card use, partially because of the ubiquity of credit cards, and also because of the amount of debt in the marketplace. In particular, concern about the effects of debt on vulnerable consumers has led to more of this kind of research amongst the social policy, consumer advocacy and academic communities.

One of the first group of studies to look at the influence of cards on spending was conducted by George Loewenstein and his colleagues and published in 1998 and 2001. They looked at a broad range of different spending scenarios, including whether people experienced pleasure or pain when spending, the role of ‘coupling’ (the purchase of a product and payment together, as happens with cash), and whether consumers prefer to pay flat or variable rates for products such as internet subscriptions.

One of the many interesting findings was that paying in cash elicited greater psychological pain than other modes of payment, including the use of cards or delayed payment methods. The suggested reason for this was the ‘de-coupling’ of the actual purchase and the pain of paying for it. In other words, handing over cash to a shop assistant couples a loss of available money with a purchase. By paying with a credit card, consumers created a buffer zone between the purchase of the product and the loss of their money (both psychologically and temporally).

Continuing the theme of time gaps between consumption and payment, they also investigated whether the reality of paying off debt was captured by traditional economic models focused purely on utility. In one study, they investigated how debt payment preferences influence a person’s enjoyment of a product (or as they referred to it, ‘the hedonic evaluation of paying for products before or afterward’).

They found that we have different emotional responses to experiences as opposed to material goods. In one experiment, they looked at the purchase of a holiday and the purchase of a washer-dryer unit. If you can pay for your holiday before you go, then you will enjoy it more, they found, but paying later will not significantly affect your enjoyment of the washer-dryer. If we consider the research about materialism discussed in last week’s program of Talking Shop, we could perhaps conclude that it was always going to be difficult to enjoy the washer-dryer, so payment terms probably don’t matter.

In another experiment (this was a big project), Loewenstein and co wanted to see what students in their study would be willing to pay to attend two different sporting events. Depending on the event (one was with a ‘blockbuster’ team, while the other was not such a major event), they found that credit cards commanded a premium of between 60 and 113 per cent.

They concluded that when it came to credit cards, people should ‘always leave home without it’.

More recent research looked at how people felt when they spent vouchers as opposed to cash. In one of experiment, some participants were given $50 cash while others were given a $50 gift certificate. Researchers found that people spent more when they were given the certificate than when they were given an equivalent amount in cash.

In 2011, Nathan C. Pettit and Niro Sivanathan examined whether people might be likely to change their purchasing behaviour as a result of the global financial crisis, and in particular, whether the threat to social identity and status associated with the GFC might change their attitudes toward accumulating debt or spending credit. They referred to earlier research which found that when threatened, people often sought to restore balance in their lives by consuming material goods so that they could signal their social identity to others.

They found that the GFC presented a ‘perfect storm’ of vulnerability because of the interaction between self-threat, the need for high status products and the psychology of the payment method. This meant that people would not only seek to consume high-status goods, but because they would be more likely to use credit, this consumption would be done at a higher cost to themselves. When cash or savings were their only option, threatened individuals were no more likely than non-threatened individuals to purchase high-status goods, as the potential psychological rewards of consumption were outweighed by the psychological pain associated with payment.

Perhaps the key advice is not to ‘leave home without it’, but ‘hide it somewhere you can’t find it’.

Are you a virtuous eater?

According to studies published in 2011 a credit card can influence what you buy at the supermarket and the café.

One study, ‘How credit card payments increase unhealthy food purchases’, looked at whether credit cards and cash influenced what people put in their shopping basket at the supermarket. By examining the actual shopping behaviour of 1,000 households over a period of six months, the researchers found that shopping baskets have a larger proportion of food items rated as impulsive and unhealthy when shoppers use credit or debit cards. They also found that participants spent up to 40 per cent more on what they termed ‘vice’ products (biscuits, cakes, and pies, for example) when they were using credit cards. They also found that the mode of payment didn’t affect the amount spent on ‘virtue’ products (rolled oats, baked beans, wholemeal bread etc).

Mode of payment had a significant effect on participants identified as ‘tightwads’, who were likely to spend 56 per cent more on impulse products when they used a card than when they used cash. The researchers’ conclusion was that cards weaken impulse control, particularly for those people who normally would be very careful with their money.

One useful insight out of this study is that the day a shopping trip takes place has an effect on the purchase of vice products—people shopping on weekends are less likely to be impulsive. This could be a result of the shopping list effect: weekend shopping trips tend to be based on shopping lists, and therefore ‘purchases on such trips are less susceptible to impulsive urges’.

However, a different study, also published in 2011, found a little wrinkle. The authors of ‘Chocolate cake please! Why do consumers indulge more when it feels more expensive?’ found that when consumers were buying food items for immediate consumption, the greater the pain of payment, the more indulgent foods they chose. One study found that if we buy indulgent food for immediate consumption, the pain of using cash is offset by the excitement and anticipation of eating the delicious, exciting food.

In one of the experiments, the researchers created a cafe afternoon snack menu, and found that people who paid with cash consumed close to 80 more calories than those who used a card. Those who used cash consumed products higher in total fat (three grams or 15 per cent more), salt (130mg or 17 per cent), carbohydrates (eight grams or 13 per cent) and sugar (1.5 grams or six per cent), than those who used a card to pay.

So, the moral to all of these stories? Leave your credit cards (and cash) at home, don’t shop when threatened, and eat more chocolate cake (well, that’s my interpretation).





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