Stories | May 7, 2013

Cash or credit? Choice influences the pain of paying

The pleasure or pain of paying can help you stay on track with your spending. Nathalie Spencer explains how.

Generally speaking, the more difficult or unpleasant an activity is, the less likely we are to do it. And believe it or not, this idea can be used to help you keep on track with your budget.

At one end of the spectrum, we could make spending money very difficult. An example might be putting all of our spending money in a piggy bank that needed to be broken open with a hammer each time we want to buy something.

This hassle – making it more difficult to spend – is obviously impractical. Making the act of paying more unpleasant could be a simpler strategy.

Ouch – it costs how much?
Research suggests high prices do actually seem to cause pain. Performing fMRI brain scans on people who were making purchasing decisions, Professor Brian Knutson and colleagues investigated the activation in brain regions while people were shown various objects.

When the study participants looked at high prices of these objects, fMRI showed activation in the insula region of the brain, which is associated with disgust or pain. Higher activation in this area was seen for products that were not ultimately purchased.

The authors use these findings to suggest that people can actually find it painful to pay for things and this pain is used to help control spending.

Use credit, “buy more”
It appears that the methods of payment matter. Cold hard cash is the most painful to part with, according to a Carnegie Mellon University research brief. Co-author George Loewenstein explains that credit cards “effectively anesthetise” the pain of paying.

Lowenstein writes: “You swipe the card and it doesn't feel like you're giving anything up to make the purchase, unlike paying cash where you have to hand over bills."

The idea that value on credit cards is "easier" to spend than cash has real implications, influencing both how much we spend and on what we spend. Other university researchers, Carey Morewedge and colleagues, checked shoppers’ receipts upon exiting a grocery store and indeed found that people paying cash spent less than those who paid with a card.

And Cornell University’s Manoj Thomas and others find that the pain of paying by cash counters the desire to make impulsive purchases, such as junk food. In other words, in this particular context, paying by cash might actually improve self-control.

We like crisp, clean notes
Even the type of cash used might influence the pain of payment. Another eZonomics article described recent research showing that we are more likely to use worn notes than to pay with brand new bills.

Perhaps we prefer to keep crisp new notes in our wallet, so it is more painful for us to use them than an equivalent amount in tattered, worn notes.

Taxi meters really hurt
Behavioural economist Dan Ariely suggests that paying at the time of consumption, as opposed to pre-paying or paying a long time after the purchase (such as on a credit card), will increase the pain of payment.

So to boost the enjoyment from your holiday, an idea is to pay for the bulk of it ahead of time. Additionally, when the amount you will have to pay is highly salient as you incur the fee (think about watching a taxi meter tick along upwards throughout your journey) it increases the unpleasantness of making this purchase.

There are very few things you would want to make more painful for yourself. But for people who have trouble limiting spending, increasing the psychological pain of paying might be a useful commitment device, helping curb the impulse to spend.

A body of research suggests that how we pay for something can affect our experience of buying it. Next time you make a purchase, it might be useful to consider whether any of the factors above have influenced your spending decision.

If you struggle to keep credit card bills under control, consider a cash-only diet. On the flip side, if you find it hard to spend money and think this reluctance may prevent you enjoying some of life's pleasures, try using your card and pre-paying for a purchase.

Nathalie Spencer
Nathalie Spencer

Behavioural scientist at ING

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