Do people tend to spend less when using cash than credit cards?

Question

I know this is a popular theory on this site and finance blogs/media in general, but I'd like to know if there is any reliable research on the subject. I can share personal experience that makes me think it's true, and there is plenty of anecdotal evidence, but I'm hoping for something more concrete either way - I'm not trying to justify a position, but earnestly looking for the right answer.

Here's some specific aspects I've heard and/or have personally experienced:

• The emotional/psychological difference in handing over cash versus swiping a card or buying on a phone
• Easier to stay on budget with a depletable resource (vs. a line of credit)
• More bargaining power with cash. I have tried this on smaller purchases (e.g. appliances) and haven't been successful - have not tried it on larger purchases (e.g. car)
• Incentives to overspend to earn points/miles/rewards
• Cash can "burn a hole in your pocket" - meaning it's tempting to use it just because it's there.
• Cards give you a itemized breakdown of where you've been spending, making it easier to see where your money is going

Are there any specific studies or research that indicates whether people in general spend less when using cash?

I'm specifically interested in situations where cash vs card is a reasonable option - meaning retail discretionary spending (not monthly bills). I'm also not wanting proof that it applies to everyone universally. I'm more interested in knowing if the statement is appropriate when dealing with finances in general. Certainly there's a lot of room for individual responsibility/discipline/behavior.

EDIT - added a few bullets and clarifications from the answers below.

Answer 1

I found the study "The irrationality of payment behaviour" accidentally while searching on the term "DNB Study" instead of "D&B Study". This study, which, when I followed the link, went to the web site dnb.nl (Dutch National Bank), instead of dnb.com (Dun & Bradstreet). It mentions all the salient points that I hear Dave Ramsey and others mention when they talk about studies on this subject of credit vs cash. Also, it cross references to many other studies by various researchers, banks, and universities. Is this the "missing mythical DNB study?" I'll let you decide. Relevant "coincidental" points from the study:

• Payment method influences the level of pain when paying (Chatterjee and Rose, 2012).
• "consumers make use of the fact that cash allows one to see at a glance not only what one has available to spend, but also how much one has already spent" (Deutsche Bundesbank, 2011)
• DNB used a functional MRI study to measure the brain's response to the emotional choice between cash and card.

To be fair and complete, I should mention that clearly the relevant parts of this DNB study are talking about discretionary spending. Auto-paying your mortgage with a card is clearly not going to cost you more (unless you somehow forget to pay off the card or some other silliness).

Answer 2

I'd like to know if there is any reliable research on the subject.

Intuitively, this must be true, no? Is it? First, is it even possible to discover the correlation, if one exists? Dave Ramsey is a proponent of "Proven study that shows you will spend 10% more on a credit card than with cash." Of course, he suggests that the study came from an otherwise reliable source, Dun & Bradstreet. A fellow blogger at Get Rich Slowly researched and found -

Nobody I know has been able to track down this mythical Dun and Bradstreet study. Even Dun and Bradstreet themselves have been unable to locate it. GRS reader Nicole (with the assistance of her trusty librarian Wendi) contacted the company and received this response: “After doing some research with D&B, it turns out that someone made up the statement, and also made up the part where D&B actually said that.”

In other words, the most cited study is a Myth.

In fact, there are studies which do conclude that card users spend more. I think that any study (on anything, not just this topic. Cigarette companies buy studies to show they don't cause cancer, Big Oil pays to disprove global warming, etc.) needs to be viewed with a critical eye. The studies I've seen nearly all contain one of 2 major flaws -

• Behaviors are contrived. Specifically, the studies don't observe real life, they take a snapshot of behaviors of people choosing between a gift card and cash for a food purchase. Such studies don't hold up well to extrapolation to a full family grown up budget.
• Study itself is flawed. It's important to understand how statistics work, and what makes for a valid observation. Some time ago, a study came out linking coffee drinking to cancer. I immediately told my wife the study was a joke (as in 'flawed' not an attempt at humor). When the study was debunked some time later, the false correlation was revealed. Coffee drinkers have a higher propensity to smoke than non-drinkers. The coffee --> cancer was a false correlation. Or rather correlation without causation. The paper vs plastic studies that otherwise would be valid fail to separate the obvious 2 groups among card users. Those who pay in full vs those who carry a balance. Say only 1/3 pay in full, and have no impact from spending. 2/3 use card, carrying balance, but actually spend 15% more. The summary line is still "card users spend 10% more."

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My own observation - when I reviewed our budget over the course of a year, some of the largest charges include -

• Insurance Home, Car, Life
• Medical costs
• Dance classes (my daughter's career choice, a hefty annual expense)
• TV/Cable/Cell
• Gas (2 cars, 3 drivers)

I list the above, as these are items whose cost is pretty well fixed. We are not in the habit of "going for a drive," gas is bought when we need it. All other items I consider fixed, in that the real choice is to pay with the card or check, unlike the items some claim can be inflated. These add to about 80% of the annual card use. I don't see it possible for card use to impact these items, and therefore the "10% more" warning is overreaching.

To conclude, I'll concede that even the pay-in-full group might not adhere to the food budget, and grab the $5 brownie near the checkout, or over tip on a restaurant meal. But those situations are not sufficient to assume that a responsible card user comes out behind over the year for having done so.

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A selection of the Studies I am referencing -

• Always Leave Home Without It
• Do Payment Mechanisms Change the Way Consumers Perceive Products?
• Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior
• The Impact of Credit Cards on Spending: A Field Experiment
• Spending and credit cards

Answer 3

Psychology Today had an interesting article from July 11, 2016, in which they go through the psychological aspects of using cash vs. a credit card. This article cites a 2008 paper in the Journal of Experimental Psychology: Applied that found:

“the more transparent the payment outflow, the greater the aversion to spending or higher the ‘pain of paying’ …leading to less transparent payment modes such as credit cards and gift cards (vs. cash) being more easily spent or treated as play or ‘monopoly money.’”

The article cites a number of other studies that are of interest on this topic as well.

Answer 4

Others have commented on the various studies. If, as JoeTaxpayer says, this one particular study he mentions does not really exist, there are plenty of others. (And in that case: Did someone blatantly lie to prove a bogus point? Or did someone just get the name of the organization that did the study wrong, like it was really somebody called "B&D", they read it as "D&B" because they'd heard of Dun & Bradstreet but not of whoever B&D is. Of course if they got the organization wrong maybe they got important details of the study wrong. Whatever.)

But let me add one logical point that I think is irrefutable: If you always buy with cash, there is no way that you can spend more than you have. When you run out of cash, you have no choice but to stop spending. But when you buy with a credit card, you can easily spend more than you have money in the bank to pay. Even if it is true that most credit card users are responsible, there will always be some who are not, and credit cards make it easy to get in trouble.

I speak from experience. I once learned that my wife had run up $20,000 in credit card debt without my knowledge. When she divorced me, I got stuck with the credit card debt. To this day I have no idea what she spent the money on. And I've known several people over the years who have gone bankrupt with credit card debt.

Even if you're responsible, it's easy to lose track with credit cards. If you use cash, when you take out your wallet to buy something you can quickly see whether there's a lot of money left or not so much. With credit, you can forget that you made the big purchase. More likely, you can fail to add up the modest purchases. It's easy to say, "Oh, that's just $100, I can cover that." But then there's $100 here and $100 there and it can add up. (Or depending on your income level, maybe it's $10 here and $10 there and it's out of hand, or maybe it's $10,000.) It's easier today when you can go on-line and check the balance on your credit card. But even at that, well just this past month when I got one bill I was surprised at how big it was. I went through the items and they were all legitimate, they just ... added up. Don't cry for me, I could afford it. But I had failed to pay attention to what I was spending and I let things get a little out of hand. I'm a pretty responsible person and I don't do that often. I can easily imagine someone paying less attention and getting into serious trouble.

Answer 5

First, let me answer the question the best way I can: I don't know if there are any studies other than those that have already been mentioned.

Now, let's talk about something more interesting: You don't need to base your behavior on any study, even if it is scientific.

Let's pretend, for example, that we could find a scientifically valid study that shows that people spend 25% more when using a credit card than they do when spending cash. This does not mean that if you use a credit card, you will spend 25% more. All it means is that the average person spending with a credit card spends more than the average person paying cash. But there are outliers. There are plenty of people who are being frugal while using a credit card, and there are others who spend too much cash. Everyone's situation is different. The idea that you will automatically spend less by using cash would not be proven by such a study.

When hearing any type of advice like this, you need to look at your own situation and see if it applies to your own life. And that is what people are doing with the anecdotal comments. Some say, "Yep, I spend too much if I use a card." Others say, "Actually, I find that when I have cash in my wallet, I spend it on junk." And both are correct. It doesn't matter what the study says the average person does, because you are not average.

Now, let's say that you are a financial counselor who helps people work through disastrous financial messes. Your client has $20,000 in credit card debt and is having trouble paying all his bills. He doesn't have a budget and never uses cash. Probably the best advice for this guy is to stop using his card and start paying cash. It doesn't take a scientific study to see that this guy needs to change his behavior.

For what it is worth, I keep a strict budget, keeping track of my spending on the computer. The vast majority of my spending is electronic. I find tracking my cash spending difficult, and sometimes I find that when I have cash in my wallet, it seems to disappear without a trace. :)

Answer 6

I don't think that there is any good way a study can average this and bring a useful result:

The core problem is that there are people that will spend more money than they should, if they become technically able to, and the credit card is just one of the tools they abuse for that (similar to re-financing with cash-outs, zero percent loans, etc.).

On the other side, there are people who control and understand their spending, and again, the mechanism of payment is irrelevant for them.

Studies measure some mix between the groups, and come up with irrelevant correlations that have no causality.

If you think any tool or mechanics got you in financial trouble, think again: your spending habits and lack of understanding or care get you in financial trouble - nothing else. In a world where it is considered cool to 'don't understand math', it is no surprise that so many people can't control their finances.

Answer 7

I thought I'd see if the credit card companies had anything to say about this while trying to get merchants to sign up. I went to visa.com, clicked "Run Your Business" in the top nav, then "Accept Visa Payments". This page has a "More benefits of accepting Visa" link with an overlay (which I can't easily link directly to), which includes these lines:

Larger transactions

While the average cash transaction is $17, credit card purchases average $70 while debit card purchases average $36.²

² Visa Payment Panel Study (2Q11 to 1Q12 time period); Visa MARS Data: March 2015 – May 2015

That obviously doesn't tell the entire story (I suspect people are more likely to pull out cash when they're just buying a stick of gum, and more more likely to pull out a card when they're buying large electronics), but certainly there is some evidence from the credit card companies themselves that people spend more when using cards, which is one of the aspects they use to convince merchants to accept cards.

I think the best evidence that people spend more is that more and more merchants accept cards. Accepting cards comes with some significant costs (though it's important to keep in mind that accepting cash can come with some significant costs as well). I suspect that merchants wouldn't do so unless the increased sales that they get for accepting cards makes up for the fees that they need to pay and the equipment they need to buy to accept them (not to mention the risks of chargebacks and the like).

Answer 8

Unless a study accounts for whether the users are following a budget or not, it is irrelevant to those who are trying to take their personal finances seriously. I can certainly believe that those who have no budget will spend more on a credit card than they will on a debit card or with cash.

Under the right circumstances spending with cards can actually be a tool to track and reduce spending. If you can see on a monthly and yearly basis where all of your money was spent, you have the information to make decisions about the small expenses that add up as well as the obvious large expenses.

Debit cards and credit cards offer the same advantage of giving you an electronic record of all of your transactions, but debit cards do not come with the same fraud protection that credit cards have, so I (and many people like me) prefer to use credit cards for security reasons alone. Cash back and other rewards points bolster the case for credit cards over debit cards.

It is very possible to track all of your spending with cash, but it is also more work. The frustration of accounting for bad transcriptions and rechecking every transaction multiple times is worth discussing too (as a reason that people get discouraged and give up on budgeting).

My point is simply that credit cards and the electronic records that they generate can greatly simplify the process of tracking your spending. I doubt any study out there accounts for the people who are specifically using those benefits and what effect it has on their spending.

Answer 9

One study found that, while people using gift certificates bought no more items than those who used cash, they tended to spend more per item.

In "Study 3" the paper "Monopoly money: The effect of payment coupling and form on spending behavior", sets up a case where shoppers are given $50 in cash and $50 in gift certificates (the leftover of which can be exchanged for cash). They were asked to choose different brands and types of items to buy.

They study found that

There was no difference in the number of items purchased as a function of payment form for scrip

However

means across all product categories show that participants spent more per item when they were given [the gift certificate]