Credit cards make you spend more
Even those who think they're responsible with credit cards are still losing out when they use the plastic. The responsible ones think that by paying off their balances each month and not incurring interest charges, they're doing just fine with their credit cards.
Not so, say Drazen Prelec and Duncan Simester of the Sloan School of Management at MIT. Even when you're exhibiting what appears to be responsible credit card behavior, there is a big chance that you're spending more than you would have if you were paying for things in cash.Specifically, the study found that participants spent more with a credit card than when they were instructed to use cash. The researchers found that consumers were willing to spend up to 100% more with a credit card. How does that work? You might go to a restaurant with a budget in mind. If you've only got the cash that lines up with your budget, that's all you're able to spend. But with a credit card in hand, it's far too easy to exceed that budget, and consumers often do.
Yikes. I use plastic a lot, but I pay off my balance every month. A credit card is much more convenient than cash. But I admit it. I do spend more than I would if I had to have the cash in hand. Even for the financially literate who are normally responsible with their plastic, the cash-in-hand theory can impose some healthy spending limits on us. I might try using cash a little more often.
Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.