Using Cash Versus Credit

As young people get jobs and open bank accounts, they are often faced with another decision—whether or not to get a credit card. A credit card allows consumers to make purchases against a line of credit. As purchases are made, a balance accrues. Typically, the balance must be paid off monthly, or the holder will be charged interest. While there are benefits to getting a credit card, research shows that having a credit card encourages spending. 

A number of factors, including the availability of cash or credit, affect consumer spending choices. A 2000 study by economist Drazen Prelec and management researcher Duncan Simester found that consumers were willing to pay as much as 100 percent more for a desirable item when directed to pay with a credit card rather than cash. Participants bid up to $28.51 for a pair of sold-out basketball tickets when they thought they would be spending cash but up to $60.64 when they planned to pay with a credit card. 

Additional studies have found similar results. A 2003 paper published in Marketing Letters: A Journal of Research in Marketing found that consumption increased when buyers used methods that made the reality of their spending less immediately apparent. Methods such as credit cards or online payment methods tend to result in higher spending than does cash, where the spending is immediately visible to the buyer. Similarly, a 2009 study published in the Journal of Marketing identified the use of a credit card as one factor that increased unplanned purchases made at the grocery store. 

These studies hold implications for how real-world consumers manage personal finances. While credit cards allow holders to track spending, earn rewards, and build credit scores for large purchases such as homes, there can be drawbacks. If consumers increase their spending when using a credit card, they may be more likely to overspend or miss their savings goals.