There is some nuance to the argument for never using a credit card again, but this line, from a New York Times article last fall, is a fair, if reductive, distillation of it: “In certain contexts, people were willing to pay up to twice as much for the same item when paying with a credit card instead of cash.”
People using the same nation’s dollars, buying the same products, under the same experimental conditions, found it acceptable to part with twice as much money if they used a credit card instead of cash. Twice as much.
The country surely has a problem with credit-card debt, which, per capita, increased 1,500% between 1980 and 2010. That’s what most people assume to be the issue with using a credit card. (“Most people,” by the way, are likely wrong: A 2009 study found that two-thirds of Americans don’t actually know how credit cards work.)
But their other damaging quality—one that applies even to people who pay all their bills on time—is their ability to anesthetize the pain of a transaction by delaying payment.
Credit cards effectively give people interest-free loans (for those who pay their bills on time), which in part explains why people would pay extra to use them. But the amount of overspending they induce more than eats up any financial gain from an interest-free loan.
Essentially, using a credit card means agreeing to pay a hefty tax to make transactions seem less painful. No matter how much rationalizing one tries to do—”But I get so many frequent-flier miles from my card!”; “But I can always pay my bill!”—the overspending induced by a credit card will, except in tandem with the most un-fun, disciplined rules, outweigh its perks.
A seminal 2001 study by Drazen Prelec and Duncan Simester titled “Always Leave Home Without It” firmly established a “credit card premium” that arises under certain circumstances.
That premium was identified decades earlier, by Richard Feinberg, a professor of consumer behavior at Purdue University, in a 1986 study. Feinberg’s experiments suggested that simply seeing a credit-card logo was enough to make people willing to spend more money on a product.
Prelec and Simester’s findings downplayed the importance of logos, but further solidified the theory that credit cards extract more money from people than cash in identical circumstances. The two researchers found that their Boston-based experimental subjects were willing to pay strikingly different amounts of money on tickets to a Celtics game, depending on their method of payment.
Those paying with cash found roughly $30 to be a reasonable price, while those paying with credit on average were satisfied with $60. This Celtics experiment suggests that the premium is largest and most dangerous when people are making one-off purchases or buying things with uncertain value.
“Twice as much” is a finding so outlandish that many will consider themselves exempt from credit cards’ dark magic—in fact, even the people who have rigorously studied it themselves use credit cards. Prelec told The New York Times last year that he uses one occasionally—only to book travel or make big purchases, which, he claims, doesn’t violate the recommendations of his own research.
The University of Maryland’s Joydeep Srivastava, the author of another study scrutinizing plastic, still uses one too. “Mostly because my credit card is giving me lots of miles,” he explained to The Times.
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