If you want to spend less, stick with cash

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.

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. They might also want to sign my colleagues’ petition demanding a guarantee from our central bank and government that we will never be forced to use cards over cash when we don’t want to. You can do this here.

  • Cameron Holder

    It would be interesting to know if this behaviour has changed somewhat since the 80’s. The rise of the debit card and contactless must be having some effect, my guess would be that debit cards have lowered the propensity to spend more (vs credit cards) while contectless has probably raised it a bit.

  • MikeT

    All true, no doubt, but you can also use credit cards to your advantage. Pay it off every month and you get free credit for up to 2 months; some offer “cashbacks” (admittedly small) on spending on travel etc; best of all, the one I use gives me an interbank FX rate with no charges, at least against Euros. So I am compensated somewhat for all the over-spending I do….

  • brianm101

    For me its not about ‘credit’ its the sheer convenience and security of not having to carry paper cash or worse loose change! Besides the risks of carrying cash you also have the ever present risk of being given counterfeit notes – even from a bank/building society.
    Then there are the other benefits such as additional protection if the product doesn’t arrive or is faulty or even the bonuses offered by credit card companies (have £500+ in points). So it doesn’t make financial or security sense not to use them. If you spend more than you should, then you probably have other problems anyway in using credit!

  • Ron

    I personally find the opposite is true however I would describe myself as financially savvy and not particularly materialistic, in the days when I used carry cash to spend on regular items I would have no idea where most of the money went each month I now have virtually every penny accounted for with the added rewards from whichever credit card is doing the best deal, at the moment I use a major retailers card which gives 1 percent in their stores and 1/2 percent elsewhere, I’ve just received £45 in John Lewis vouchers for the last quarters spend, sure beats dealing with all those filthy notes and coins!

  • 4caster

    I don’t want to spend less, thank you. I just seek good value.

  • A Frith

    I use my card for most small items and my statements (paper) monthly show a long list of petty charges – car parking, coffee, cherry lip balm, whatever. What bothers me is how hard it is to spot the phoney charges among all this.
    Years ago I learned to keep an eye on my statements because small fraudulent charges did creep in.
    Nowadays I have no hope of spotting them, life’s too short to trawl through all those charges.

    • Cameron Holder

      Use a service like moneydashboard to pull in all your bank data and categorise it. With a bit of work you can set it to automatically tag your usual transactions (like tesco gets tagged as supermarket etc). When an unusual transaction pops up you will spot it immediately in your ‘untagged’ list. It’s also a handy service to pull all your bank and credit card accounts into one place.

  • Kenneth_Brown

    Using cash for most of my purchases focuses my attention on my spending. I also have a hard limit on what I can spend based on what’s in my pocket. With a debit card it’s like having the contents of my checking account with me at all times and an ill considered impulse buy could lead to problems. I keep one credit card with me to cover emergency expenses such as needing to replace a punctured tire.

    Two other incidents have also made me work in cash more of the time. When I was on a business trip I discovered that my debit card was hacked and the bank cancelled it when somebody tried to purchase an expensive plane ticket from South Africa. I called my bank and unlike American Express, they don’t provide an emergency replacement card. 400 miles from home with 3 days remaining on the conference I was attending made paying for meals and incidentals a potential problem. Fortunately, a colleague was able to loan me some cash until we returned home. Getting cash via my credit card would have been expensive. The interest rate is higher than for purchases and the interest is charged from the date of withdrawal, no grace period. The card issuer also applies payments to the lowest interest charges first when I mail my payment, so I would be paying the higher interest charge until I paid the balance in full. The second problem is when a shop or petrol station’s debit/credit machine is not working. In the city it can be easy enough to find a shop that has a working terminal, but if I’m at motorway services wanting to fill up an empty petrol tank, I might not be able to find another petrol station with a working machine.

  • grandfather74

    Am I the only person in the country with zero debt? I use a credit card which pays me cashback on most purchases and pay it off every month – by Direct Debit so I don’t forget to do it. Who are these weak-willed people who can’t control their spending? I was brought up on the principle “If you can’t afford it don’t buy it”. Obviously any vital spending (mortgage for example) has to be budgeted for but the principle is worth following. This goes for George Osborne as well as everyone else. If he applied this principle to his spending I wouldn’t have to listen to Tim Price droning on for hour after hour in his ‘Capital and Conflict’ piece without getting to the point. (Is he paid by the word?) I’ve never made it to the end of this stuff yet and have decided to give it up.