Why We Spend More Using Credit Cards

We’ve talked about this before: Use cash and not your credit cards and you’ll spend at least 12-18% less – no matter what, unless you have the willpower of some marathon runners.

That stat comes from an extensive Dun & Brad study. My opinion is that it’s a lot more than that. I was in a golf store last week in Phoenix. I was buying a $60 club and had looked at a bunch of head cover sets. Most were $60 and that wasn’t going to happen until I found one for $20. At the cash register, I swiped my card and proudly took my club and covers to the car. It was half way out of the parking lot that something clicked in my head. Hold it…did you just sign for $120 plus on your credit card? Hmm…$60 pus $20 plus tax…time out… When I looked at the receipt, that set was $65! Of course I returned it, but what a lesson in just signing and going without connecting the money to the total to the credit card charge. Yikes! That would NEVER have happened if I’d been asked to part with six $20 bills and then some.

But now, researchers at Carnegie Mellon, Stanford, and MIT think they know why. Quite simply, they found that we literally spend until it hurts, according to their study published in the journal Neuron. Remember the old Nazareth song: Love hurts? Well, spending hurts, too.

Researchers took MRI brain scans of participants who were given $20 and the choice of buying something or keeping the money. Participants were shown pictures of products they could buy and then the price. The MRI showed the pleasure sensors part of the brain being activated when they liked the product. But when a super high price was shown for the product, it triggered the pain part of the brain sensors.

So, the old saying that there’s a pain of paying is actually true. Our brains have a physical reaction when we have to part with real money. Unfortunately, our brains don’t connect real money with credit cards. We see the product, we like it, want it, and can totally avoid the pain of paying with cash! It’s a win-win in our brain…for a while. Our pleasure centre of the brain is satisfied and we leave the store with exactly the same amount of money in our wallet! The pain is delayed until the credit card bill arrives.

If the logic of the study makes sense – and it should – test it out for yourself. Check the cut-off date of your credit card. My last date for the coming month is always the 14th. Then, starting the next day, go one month without your credit card. Pay by cash for everything from groceries to gas, lunch out to golf. Keep your ATM slips and add up what you spent for the month, compared to what your spent on your credit card the month prior.

It’ll at least be the 12-18% less – and that could be a lot of money. The logical part of your brain, your wallet, finances, budget and credit card balance will thank you for it! 99.99% of people won’t do the experiment. I know that. They’re either in denial, don’t want to know, or aren’t interested in saving a few hundred bucks a month. I hope you’re in the tiny group that will give it a try.

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