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The following is a guest post from David Rodwell, enjoy the post!
We like to think that we’re responsible and thorough consumers. When we get ready to make a major purchase, we consider all of the financing options, and choose the right one for the product. Yet, what you may not realize is that the method you use to pay for a given product may actually impact which product you choose.
That’s the conclusion of some recent research by Professor Promothesh Chatterjee of the University of Kansas and Professor Randall Rose of the University of South Carolina. Their recent paper suggests that the payment method consumers choose impacts just how they make their decisions.
The basic thrust is this: when you use cash, you’re more likely to be concerned about cost. When you use a credit card, you’re more likely to be concerned about a product’s benefits.
Benefits over cost
This raises some interesting questions. For example, if you’re looking for a long-lasting, robust solution to a given problem, yet you’re paying cash, you may not wind up with what you really need.
Let’s suppose, for example, you want to procure a new entertainment system. You want a crisp, clear picture and theater-quality sound.
If you’re paying with cash, you’re more likely to choose a lower-end solution. In today’s terms, that might be a Plasma TV rather than an LCD TV. You might choose a surround sound bar that more or less mimics theater-quality sound, rather than a full 7.1 surround sound system with all of the bells and whistles.
On the other hand, if you want to buy the best in breed, you’re probably better off using a credit card.
Getting the best price
If, on the other hand, you’re mostly concerned about spending too much money, cash makes more sense. When you pay with cash, you’re more likely to be concerned with all of the costs of a product, including:
- Price
- Delivery cost
- Installation cost
- Warranty cost
- Delivery time
Cash customers had greater recall of cost-related words, and they were usually more likely to purchase an item with a lower cost at the expense of inferior benefits.
The pain of payment
Part of what’s behind all of this is an idea known as the pain of payment. When you pay with cash, you immediately have less cash. You’re able to see – simply by looking in your wallet – that you have less money. Therefore, you make decisions such that you’ll preserve as much of it as possible.
When paying with a credit card, however, payment is decoupled from consumption. You have the immediate gratification of using a credit card, and payment is usually several weeks off. By the time you get the credit card bill, you’ve already consumed the product.
Choosing the right payment method
This tells us also that credit cards are changing the way we make purchases. By picking which payment method you want to use for a given product, you’ll actually help yourself achieve whatever goal it is you have for that product. Use credit cards when you’re going for high-profile, high-benefit products, and use cash when you need to save some money.
David Rodwell is an experienced writer who covers everything from business to personal finance. Check out his site CreditCardProcessing.net for similar articles!
SB’s thoughts: I do not know if there is any connection between payment mechanism and spending behavior, but, I have seen that when I am buying on cash I do feel like spending too much money, honestly. Seeing the dollar bills disappear from my wallet gives me panic attack. Here’s what I keep in my wallet.
When I just swipe my plastic card, I don’t get that kind of feeling of being defeated. The card comes out and goes back in to the wallet, nothing is lost, right?
When I got this article as a guest post offer, I went in to study the research paper. They make a few good points. I know it’s psychological, but if that can help you stop impulse purchase then paying on cash can definitely save you money!
What are your thoughts readers? Do you feel the same way? Do you feel money is more valuable when paying with cash rather than the credit card?
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Researchers JUST figured out that people spend less when using cash than credit cards? I thought that was already known! Good analysis of the phenomenon though 🙂
How did you know that, for me it was in the subconscious mind but never read anything anywhere.
For me, my spending behavior doesn’t change when I use cash or a credit card. I know that either way, it’s coming out of my bank account (my husband and I pay for everything with a rewards card and pay it off every month). I actually rarely have cash on me.
I am also the same. I rarely carry bills in my wallet. Always pay with the card.
I’m a huge advocate of monitoring how you are spending you money. I think that keeping cash in the pocket is almost like a physical limit – and just incase that limit fails I tend to keep an emergency card on me. That being said, it’s only during the week that I practice this. It helps curve a lot of the impulse spending that I would make out of convenience.
A lot to learn from this habit. Point is the amount of reward point you are losing by using cash, are you getting that back by not buying things on card?
I can accept the psychology of using cash to save more money, but for large purchases, the practice is too risky. With my credit card, I get an extended warranty. If the product turns out to be a piece of junk, I have more recourse if I used my credit card than if I used cash. And don’t forget the reward points. Oh, the rewards!
Ah yes, the rewards. They can great if you pay your balance in full each month (I sure do) but people who carry a balance tend to negate the benefits over time.
I usually research what I want and once I am satisfied that I have mapped everything out I bargain hunt. I hunt for deal, coupons, friends who work in places.
I get too many rewards for using cc and I never pay a fee because I pay them off. It’s a win for me and another win for me. 🙂
That’s actually the opposite of what I thought you’d tell me, based on the headline. I thought that parting with cash would force us to make better decisions, not just the cheapest ones. Now I’m going to have to reconsider my purchases and motivations!
Surely the article forced me to think. Now I’ll do a comparison with the 1-2% rewards using cards with the opportunity save cost using cash.
Somehow, there’s some truth on that research. But I think it only applies for people who do not monitor their spending habits.
I may also add another option of paying- online payment gateways. Where does this fall in that research?
I think this is particularly true when it comes to tipping at restaurants. Way too many people over tip when using a credit card!
This is interesting, although it can be avoided if you set up a mental block on tip, say..never go above 18% you can be within limit even with credit card, isn’t it?