Can you imagine your life without a credit card? If you’re part of the 76 percent of undergraduate students who own a credit card, you probably can’t.
In their short 50-year lifetime, credit cards have quickly become an integral part of our economy. According to a 2016 study, only 22 percent of Americans don’t own a credit card, and the average number of credit cards owned per person is around 4. With close to 26.2 billion sales transactions with credit cards in 2012, according to the Federal Reserve, credit cards have become the preferred payment method.
This makes sense — using a credit card is more convenient than cash. Carrying around enough cash becomes a non-problem. Swiping a card takes less time, and you don’t even need to have the money you’re spending for better or for worse.
However, ease of use makes us subconsciously spend more money, which is commonly referred to as frictionless spending. With the absence of giving up a physical object, like cash, we feel less psychological “pain” when paying.
You may have experienced this at a bar. If you open a tab with your credit card, getting another beer is as easy as ordering it. However, with the physical act of pulling cash from your wallet, you’re less likely to buy that fourth round. This may be better for you health and dignity than your wallet.
A landmark 2001 study from the Massachusetts Institute of Technology found that spending increased when using credit cards as opposed to cash, sometimes by as much as 100 percent. McDonald’s even studied this phenomenon and found customers paid, on average, $7 with credit cards as opposed to $4.50 when using cash. That’s a more than 50 percent increase.
So, should you cut up your credit cards right now and live on cash for the rest of your life like your grandparents?
It’s still being debated if using a credit card actually makes you spend more money. Critics argue that while researchers have found correlations to increased spending with credit cards, they can not explain them. It’s possible that the contextual situation of when someone uses a credit card is the cause for overspending.
However, being aware of the psychological differences between cash and credit can change not only how much you spend, but how you view your spending. For example, a recent study from the Journal of Consumer Research found people feel more connected to the items they purchase with cash.
Knowing the best situations to use credit or cash can be essential to balancing your personal finances.
Jay Cranford is a 22-year-old finance senior from St. Simons Island, Georgia.