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Neuroscience Takes On Cash Versus Credit

by Jason Steele

I came across two articles recently that look at peoples spending habits change when their method of payment changes between cash and credit cards.

Credit Cards Makes You Spend?

Most people feel that the use of credit cards makes it easier to spend money.    The author of this article cites all sorts of neuroscientific journals that support that conclusion.     It also makes intuitive sense that parting with physical cash takes much more consideration than merely signing a credit card receipt.     As the author states: “When we something with cash, the purchase involves an actual loss – our wallet is literally lighter. Credit cards, however, make the transaction abstract, so that we don’t really feel the downside of spending money.”

On the other hand, I have always found that I spend more when I have actual cash in my pocket.  I feel that cash spent is never seen or heard from again, while credit card transactions are reviewed and paid for at the end of the month.    If I go past my statement closing date without making a necessary purchase, I feel that I will have that money for another month, while cash in my pocket seems to accrue no interest or reward points.    I usually deposit any significant amount of cash I receive, in order to have it available when it comes time to pay my bills.

With that in mind, I read this article, also in a neuroscience publication, about an anecdotal finding that reached the opposite conclusion.    Here, the author found that he was spending money as quickly as he could when he had cash.    The key here is that the author pays off all of his credit card bills in full every month.   For him, like me, credit cards are a method of payment, not a method of finance.   Also, it seems clear that the documentation of the purchase inherent in credit card use is a powerful motivation to literally watch your spending.

Unfortunately, it would make perfect sense for most people to spend more when using credit cards, yet people who pay their balance in full ( a minority) find they spend less with their credit cards.  People who always pay their credit cards in full have a direct relationship between their spending and their payments.   By paying less than your full balance, you are creating a disconnect between your spending and your payments.     Over the long run, you are of course paying far more for your purchases, but the pain is neither immediate, nor does it correlate with your monthly spending.    Large purchases equate to only a few dollars a month more than if you had not made them.

In the past, I have compared credit card abuse to a substance addiction.     I am not a neuroscientist, but it would not surprise me to find link in the brain behind the two behaviors.    I think those who feel that cash is the solution to overspending might be surprised to find out what happens if they monitor their credit card spending and always pay every balance in full.    Some may find the success that I and others have achieved, while others would feel like a recovering alcoholic working at a liquor store.

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