Why We Spend More When We Pay With Credit Cards

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A couple of weeks ago, I decided to treat myself to an afternoon at my favorite shopping destination, Barnes & Noble. Even though I usually have very tight controls on the number of (purchased) books that I may bring into the house, I generally let myself buy two or three new titles a few times a year. (I know. I'm a wild woman.)

It wasn't until I arrived at my personal wonderland that I realized I had forgotten to bring the $30 of fun money I had planned to spend on this expedition. No matter, I thought. I would just charge my book splurge and pay the credit card back out of the cash.

It probably will come as no surprise to learn that I left the store with $60 worth of books rather than the $30 I'd planned.

Clearly, I'm not to be trusted with a credit card in a bookstore.

While overspending by $30 is not a big deal if it only happens once in a while, it can definitely be part of a pattern — a predictable pattern of overspending with credit that can happen to the best of us. (See also: Party Like It's 19.99: The Psychology of Pricing)

This is because consumers tend to pay more money when they use credit cards rather than cash for purchases. Behavioral economists and psychologists have identified two specific reasons why this payment quirk affects us all.

1. Paying Cash Couples the Pain of Payment With the Purchase

Imagine that every time you bought a song on iTunes you had to count out the $0.99 in cash to pay for your purchase. While it's still just as cheap as hitting the download button that's connected to your credit card, it somehow hurts more to think about parting with the cash. Psychologists describe this effect as coupling.

Coupling describes how much an experience of consuming something is tied to the experience of paying for it. When you pay in cash for something, your experience of the product is intimately tied with the feeling of paying for it. For example, if you paid cash to enjoy a few margaritas with a friend, the act of enjoying your drink and the act of paying for it would be directly coupled. The pain of paying is felt at about the same time as the pleasure of the tequila.

But if you instead pay for your evening out with a credit card, the payment is kicked down the road. You distance the pain of payment far enough away from the act of drinking your margarita that they do not feel closely associated at all. In other words, you decouple the pain from the pleasure. This allows you to focus on your enjoyment to the detriment of your bottom line.

2. We Focus on the Benefits of Items Bought on Credit, Not the Costs

An important effect of decoupling payment for an item from the pleasure of buying it is that consumers tend to overvalue the benefits of their purchase.

According to a study by the Journal of Consumer Research, consumers using credit cards pay more attention to the benefits of the product they are buying, ignoring the costs. Because the pain of purchasing the product has been decoupled from its benefits, consumers are more likely to weigh those benefits in a vacuum, without considering the price.

For example, suppose you had $50 in cash to spend on a lovely meal out with your spouse. While the surf and turf sounds delicious, you don't want to be embarrassed when the check comes and your fifty doesn't cover the meal, let alone the tip. So you order from the right side of the menu and end up with a safely inexpensive pasta dish.

If, on the other hand, your plan is to pay for dinner with credit, then you have much less reason to worry about how much the lobster costs per pound. And that means you're more likely to think about how mouth-watering any particular dish may be as opposed to how much it will set you back. A check arriving for double what you planned to spend can be shrugged off if you can pay for it easily with credit.

Refocusing on the costs of an item — or even on its cost-benefit analysis — can be very difficult to do when you have already decided to pay for something with credit. This is what happened to me when I spent double what I planned for books. Because I knew I had a credit card, I didn't even bother to look at how much each book cost, and instead just thought about how much I wanted to read them.

Combating the Effect of Credit on Your Brain

These psychological quirks are of course why so many personal finance gurus recommend that you spend only cash on your purchases. Paying in cash will always keep the pain of paying immediate in your mind — and make it impossible for you to think only about the benefits without considering costs.

But not everyone is able or willing to switch to a cash-only life. For regular credit card users, it might be possible to tie the pain of payment to the enjoyment of purchases by writing down the cost of any particular purchase. This might be especially helpful if the record is a running tally of your credit card charges for the month, meaning you are consistently forcing yourself to see what your entire credit card payment will be at the end of the month. That act of writing down how much each transaction costs could help you keep the price in mind even if you won't actually "pay" until your statement arrives at the end of the month.

Unfortunately, this can be extremely difficult to put into practice. It would require diligence to carry your monthly tally around with you. Force yourself to add to the tally every time you pay with plastic. Overall, if you want to force yourself to be mindful of costs and feel the pain of payment, it is much easier to simply carry cash.

Which is certainly what I will do next time I let myself go for a book shopping spree.

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