We’ve known for decades that credit card shoppers spend more.

“Credit cards separate the consumption aspect from the cost aspect,” explains Promothesh Chatterjee, assistant professor of marketing at the University of Kansas. Translation: Compared to paying with cash, when you hand over a piece of plastic, you don’t immediately feel the loss of your wealth. In marketing terms, the “pain of payment” is delayed- sometimes weeks.

Suppose you’re at the mall. Instead of paying by cash or a check, you continually whip out your credit card: a sweater for your brother, scarf for mom and a Starbucks (SBUX) grande mocha latte to keep you fueled during your excursion. You get instant gratification via your repeated credit card purchases because you’re acquiring something you want, and this makes you happy. It is even more pleasurable because you don’t feel the stab of pain of literally handing over money each time you make a transaction.

Of course, eventually the pain of parting with your wealth arrives when you receive your monthly credit card statement. But instead of individual nicks for each purchase, you get whacked in one fell swoop, albeit for a larger amount.  Nonetheless, consumer tend to prefer this type of pain because   in Chatterjee’s words, “the pain is accumulated. You feel it once instead of all day long.”

Chatterjee and Randall Rose, chairman of the marketing department at the University of South Carolina, have collaborated on research that details how credit cards affect our spending behavior. Their research finds that the form of payment we use also changes the way we think about a particular item or service. When faced with two or more choices, if we intend to pay with a credit card, this factor alone leads us to buy the more expensive item. The individual who uses a credit card to buy something focuses more on the benefits the product offers rather than its cost. The reverse is true if you are paying with cash.

Chatterjee cites himself as an example. “I never carry cash in my wallet.” Instead, he pays for everything with a credit card, a habit he developed as a doctoral student who lived on credit because he “never had enough cash.” (The difference is that these days, he pays his credit card bill off each month.) Thus, paying via a credit card is Chatterjee’s “default” method of making a purchase.

Recently, he decided he wanted an electronic tablet, boiling the decision down to either an iPad or a Kindle Fire. “The iPad is speedier, has more apps and games and is more expensive,” he says. “The Kindle Fire does 75-80% of what an iPad will do and costs less.” Furthermore, the Kindle Fire met all of Chatterjee’s needs.

“Because my default mode of payment is credit card, cost is not something I’m consciously weighing” at the time of purchase, admits Chatterjee. As a result, “Now I am the proud owner of an iPad.” To allay his guilt and justify the expense, he reminds himself that the product offers additional educational and financial apps that he will use in his work.

As Chattterjee and Rose write, “consumers perceive and evaluate the same products differently” depending on whether they are paying with a credit card or cash.(1) The result is that, if you’re paying via credit card, the $500 watch you buy yourself will seem to keep better time, sparkle more, look cooler and boost your ego more than if you plunked down five c-notes for the exact same timepiece. “Marketers are very savvy,” says Chaterjee, “they have it figured out.” Why do you think stores are so quick to offer a credit card to just about anyone with a pulse?

The next time you’re about to swipe your credit card for a purchase- big or small- ask yourself a simple question: Would I still want this so badly and love it as much if I were going to pay with cash?

The article,”Do Payment Mechanisms change the Way Consumers Perceive Products?,” will be published in the April 2012 issue of the Journal of Consumer Research.

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.

 

Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content. 

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.