91

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.

  • 4
    @DStanley It probably would depend greatly on the kind of business that you were buying from. On one side of the spectrum, you have an individual selling a car who might not want to wait for a buyer to secure credit but instead sell to the buyer who has cash ready to go. On the other, you have large car dealerships which often make a large part of their revenue from financing. – Nosrac Aug 8 '17 at 15:03
  • 21
    The more answers I see the more I think this would be a better question for the Skeptics Exchange. – JaredStroeb Aug 8 '17 at 18:58
  • 3
    Too late to add this to the question now, but in addition to the behavioral difference between cash and credit cards, it would also be interesting to look at the behavioral difference with debit cards. -- Relevant as some answers are about 'cards' whilst there may be a significant difference between debit and credit. – Dennis Jaheruddin Aug 9 '17 at 7:34
  • 4
    An an anecdotal answer. My daughter is very careful about using her debit card, and strives to keep her account balance high. She appears to be much more willing to spend any and all physical money. – Michael Richardson Aug 9 '17 at 14:22
  • 2
    Also anecdotal, but another factor to consider: I personally do not like carrying cash for a variety of reasons I wont get into. So if I come into cash (gift, refund, etc.) I tend to spend more quickly just to get rid of it. – DasBeasto Aug 9 '17 at 15:48
54

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).

  • 14
    It's worth mentioning that DNB and D&B would be pronounced nearly identically by many Americans. I've listened to Ramsey a few times, and I believe he would be in the group that pronounces them the same. – Jeutnarg Aug 8 '17 at 18:31
  • 2
    The next step if it were specifically about Dave would be to see when he first mentioned the DNB study and see if it was before this study was released. – Erik Aug 8 '17 at 20:52
  • I was going to interject my personal opinion in this answer, but I think it stands well by itself. Personally, however, I feel there is a very large segment of the population who don't have the discipline to budget with a credit card because of this "lack of emotional pain", but there is another smaller segment who "bring down the average", if you will, who live on a strict budget, and have the discipline to not impulse buy or change their purchase decision based on plastic. And of course, there are also those who believe they're in the second group, above all influence, but really aren't. – Ogre Psalm33 Aug 10 '17 at 12:09
  • 1
    @Erik Indeed, I would be interested to know that answer too! But I'm betting that would take a lot more research to dig up, which I don't have time for right now (or some further lucky accidental internet search finds). – Ogre Psalm33 Aug 10 '17 at 12:12
  • 1
    I'm ready for more drum and bass studies – B T Aug 11 '17 at 1:07
42

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."

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.


A selection of the Studies I am referencing -

  • 2
    @JoeTaxpayer, While I agree with your last paragraph, you've narrowed the group to "responsible card user[s]." (without any study to substantiate what I'm about to say:) I'd venture that most plastic is being swiped by irresponsible people. As with any behavioral study, there will be a macro finding "on average, people studied [whatever]" and the individuals included in the study will fall in the spectrum somewhere. Will JoeTaxpayer spend more on on credit cards, probably not; will everyone on average, I'd venture the answer is yes because "everyone" includes a lot of irresponsible people. – quid Aug 8 '17 at 17:46
  • 8
    @quid - I think you got it. My issue stems from the Dave Ramsey quote "Responsible use of a credit card does not exist." This unsubstantiated statement is what set me off years ago. If you were completely omniscient, you might report back that only 10% of card users are better off. Higher, lower, I literally cannot know, I only know that zero is an absurd statement. A non-card user would have a logistical set of hoops to jump through to rent a car or hotel room or buy an airline ticket. – JoeTaxpayer Aug 8 '17 at 18:34
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    @SteveJessop et al Let's dispose of straw men. If anyone is saying that people who use credit cards pay 10% more for houses or cars ... I think that's very unlikely. Cable TV? Probably not. The real argument is that when someone walks into a store to buy something, the person who takes his shopping cart to the cash register and pays with a credit card spends 10% more than the person who pays cash. I don't know if it's true, but it seems quite plausible. It doesn't seem shocking to suppose that someone who has $100 in his wallet and pays cash will limit his purchases to $100, while ... – Jay Aug 8 '17 at 19:15
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    ... someone who has $100 at home or in the bank and who pays with a credit card might spend $110, thinking, when the bill comes in, I'll find a way to pay it. Or not even thinking about just how much money he really has available because his credit limit is $5000, so he can spend $5000. – Jay Aug 8 '17 at 19:17
  • 4
    Respectfully, the DNB study was authored 2013. The Mythical D&B study has haunted me for well over a decade. – JoeTaxpayer Aug 9 '17 at 16:12
25

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.

  • 49
    Ironically, my wife and I strive to put everything on our card so there is MORE transparency because there's a record and we can review what we spent our money on. You'll never notice how much you spend on coffee when it's 2 or 3 bucks at a time, but when you whip out the spreadsheet and you realize there's a hundred bucks spent on it, you start to rethink. Of course, you have to be more diligent about paying it off AND about actually reviewing it... – corsiKa Aug 8 '17 at 17:04
  • 2
    I agree that credit cards can provide better visibility and accountability. With tools like personalcapital.com around it is pretty easy to see where your money is going whether it is checks or credit cards. Sadly most people are using credit cards without such ease of reflection. – chicks Aug 8 '17 at 17:23
  • 3
    @corsiKa: well, that's just an artefact of you and your wife being woefully slack about demanding each other's receipts ;-) – Steve Jessop Aug 8 '17 at 18:52
  • @SteveJessop Actually it's because my wife does a lot of arbitrage and consequently has a float to buy things (where they don't often give receipts...). It becomes difficult to separate which cash is ours and which cash is her operation's. – corsiKa Aug 8 '17 at 19:13
  • Best answer. Also check videos related to human psychology by Dan Ariely. – Neolisk Aug 9 '17 at 1:26
20

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.

  • 1
    "When you run out of cash, you have no choice but to stop spending" is only true while at the store. Next stop is hitting up your friends/relatives/acquaintances for a loan, which is what over-spenders used to do before credit cards became commonplace and what people with bad credit still do today. "I would gladly pay you Tuesday for a hamburger today" – Jared Smith Aug 9 '17 at 14:45
  • 1
    If you always buy with cash, there is no way that you can spend more than you have. – Jerry Nixon - MSFT Aug 10 '17 at 14:55
  • @JerryNixon-MSFT oh really? Say that all those poor shop owners forced to sell "on notebook" even if many customers never pay out fully... – user45830 Aug 11 '17 at 7:35
  • 1
    @JaredSmith I think it's worth pointing out that approaching your friends/relatives/acquaintances have more effort involved to it. The notorious over-spenders might not be affected by it, but those that are in the middle of the bell curve would certainly factor it in. – Rystraum Aug 13 '17 at 1:57
  • @Rystraum good point – Jared Smith Aug 13 '17 at 21:05
13

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. :)

  • 3
    Great points, Ben. As you may have guessed, my main purpose is to see if the theory is suitable when helping people in general with financial questions, but you are certainly correct that behavior is individual. – D Stanley Aug 8 '17 at 21:06
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    @DStanley The interesting thing about helping people in general with their finances is that only the people that are in trouble need help. That skews the appropriate advice for them. Take, for example, Dave Ramsey. His callers are mainly people deeply in debt and trying to get out. Those are the people who need to hear, "Cut up your card and start paying cash." The ones who are responsible card users don't get in debt and don't need to call Dave Ramsey. – Ben Miller Aug 9 '17 at 3:48
8

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.

  • "irrelevant correlations that have no causality" - beautiful phrase. – JoeTaxpayer Aug 9 '17 at 2:10
5

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).

  • 1
    In the last 10-15 years (in the USA), "more and more merchants" now includes fast food and even soda/snack vending machines, whereas before you always needed cash to satisfy your cravings. – Ogre Psalm33 Aug 10 '17 at 12:21
5

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.

  • 1
    The fraud protection level IMHO depends on where you are. E.g. here in Germany the debit cards work with automatic withdrawals that have a comparably low level of immediate fraud protection, but this is offset by the possibility to reclaim any automatic payment as unjustified. In which case you immediately get back the money and the other side has to prove that their claim was justified. Whereas for my credit card, if I claim an unjustified transaction, I have to show the withdrawal was unjustified. – cbeleites Aug 9 '17 at 15:47
  • I think one key sentence here, at least for me, is the key difference between card spending vs cash. "spending with cards can actually be a tool to track and reduce spending". That's asking my money "where it went". If I have an envelope of cash labeled "food", I'm telling my money "where to go". A little too frivolous with restaurants this week? I guess we're eating out of the pantry the rest of the week! – Ogre Psalm33 Aug 11 '17 at 0:43
  • @OgrePsalm33 Great, you spent it on food. Great record. Very informative. However, I know how much I spent eating out, which restaurants I'm most likely to spend extra on, what my average grocery trip costs with years of records to analyze on my computer. I also create a budget each month before I start, so not only do I tell it where to go, but I can look back at any time to see where it went. I don't spend money willy-nilly just because I can. – Nathan L Aug 11 '17 at 1:16
  • @NathanL I understand what you mean, and I can even agree. I am very confident you live on a strict, controlled, budget. But I have several friend who think that just because they track their expenses in Mint, they are "on a budget", but after talking to them, I realize they clearly are just tracking, not planning. This is where I think cash helps some people who want to get more organized. It's just "envelope empty", there's no going online to see how close you are to going over for a category. Spending with cards can be a tool, but frequently aren't. – Ogre Psalm33 Aug 11 '17 at 12:21
  • 1
    When I used to account with cash, I often spent 3-4 hours before I could balance my accounts down to the penny. It was terribly frustrating. – Nathan L Aug 11 '17 at 12:39
3

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]

  • See my second bullet point. – JoeTaxpayer Aug 8 '17 at 16:15
  • @JoeTaxpayer I read it a couple times but I'm not sure what you're trying to tell me. – Nosrac Aug 8 '17 at 18:02
  • 5
    That such studies only prove exactly what you stated, "$50 in cash and $50 in gift certificates" are spent using different behavior and results. This does not multiply up to proving anything about a $40,000/yr budget. – JoeTaxpayer Aug 8 '17 at 18:42
  • I'm not sure if you're taking issue with the gift certificates vs credit cards or the amounts involved. Can you clarify your clarification? – Nosrac Aug 8 '17 at 19:41
  • 5
    I am saying that contrived studies using these relatively tiny sums proves nothing. – JoeTaxpayer Aug 8 '17 at 19:45

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