If you want to spend less, stick with cash

People who use credit cards spend a lot more than people who use cash – one more reason for our consumption-obsessed overlords to ban it, says Merryn Somerset Webb.

Credit cards are pretty evil things. I think we all know that. But a quick read of Robert Shiller and George Akelof's new book, Phishing for Phools, gives a glimpse into just how much ill owning a credit card can do to our spending habits.

There has long been evidence that people with credit cards spend more than those without one study showed that those paying with credit cards tend to leave tips worth 13% more than those that pay with cash.

But there is evidence that this isn't just about personalities (those who apply for credit cards might just be a different type of person than those who do not). Instead, it is about the cards themselves.

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Psychologist Richard Feinberg ran an interesting experiment in 1986 where he took two groups of people and asked them how much they would spend on seven different items (with pictures) two dresses, a tent, a lamp, an electric typewriter, a man's sweater and a chess set.

One group answered the questions sitting in a room with Mastercard logos scattered around it (they were told this was for another experiment). The other (the control group) did it in an undoctored room. You'll have guessed the result: every product went for "significantly more" in the subject group than it did in the control group 11% more for the tent and 50% more for the dresses.

A similar experiment timed and done on a screen with a Mastercard logo in the corner showed the same thing: people were prepared to pay three times as much for a toaster when the Mastercard logo was in their frame of vision. Nuts, but true. Credit cards don't just get you to spend more: they get you to spend "quite a bit more".

This explains why retailers rarely charge fees for paying with credit cards (despite the fact that providers charge them a significant amount for the service): they don't want to discourage you! They don't give discounts for cash either, for the same reason.

This might also be one more reason why our consumption-obsessed central bankers would like to ban cash (more on this here) and force all our spending to be done on cards. If the end game of monetary policy is to try and make us spend more and hence raise aggregate demand (as it is at the moment) the more we use cards (and the more we spend) the better. That's an obvious infringement of our right to manage our own psychological biases and hence of our financial freedom.

Cash isn't banned yet. So, for now, readers looking to spend less might want to leave their cards at home when they go shopping.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.