Millions of people across the UK use cash and credit cards for purchases every day. However, why do so many overspend when using a credit card, unable to pay off their credit card balance each month?
Reasons Why People Use Credit Cards
Why do people use credit cards rather than cash or debit cards despite the problems credit card debt can cause?
- Convenience
- Safer than carrying cash
- It is easier to get a refund in the case of fraud
- Online purchases made easier
- Reward points
- Frequent flyer miles
- Signing on bonus
- Discounts with some vendors
- Improve their credit score
- High-interest balance transfers from one credit card to another 0% credit card
- 0% purchases for a limited period of time e.g., 6 months
- Bonus points for referring a friend who opens up an account with the credit card company
- Travel abroad with low or no fees
- Delayed payment date
Credit Card Debt
Using credit cards is fine if you pay them off monthly. The problem is that people buy what they can’t afford, overspend and can’t pay off the credit card on time. High-interest rates compounding on unpaid debt can quickly cause credit card debt to spiral out of control.
As of July 2023, outstanding credit card debt in the UK was £66.7B, a year-on-year increase of 8%. Credit card debt was on average £2,376 per UK household and £1,248 per adult. Source: The Money Charity.
Many people are turning to credit cards for basic needs like food, due to the cost of living crisis.
Credit Cards vs. Cash
It is generally thought that paying by credit card is easier than paying by cash. Paying by credit card removes the pain point buyers feel when physically parting with their hard-earned cash. Also, the consumer is required to pay the bill several weeks after the purchase has been made.
However, when paying by cash, the effect is immediate as the cash is gone when the purchase has been made.
Does Using Credit Cards Make You Spend More?
Researchers conducted a study, ‘Neural mechanisms of credit card spending’, published in Scientific Reports which examined the effects on the brain of paying by cash or credit card.
The researchers used functional magnetic resonance imaging (fMRI) technology to look at the dopaminergic reward centre of the brain, called the striatum, of the 28 participants when using cash vs. credit cards at the point of purchase.
The striatum contains neuronal activity related to movements, rewards and the integration of both movement and reward. It is the part of the brain exploited by addictive substances such as cocaine and amphetamines.
The study found that credit card purchases were correlated with strong activation in the striatum. Credit cards acted as a cue to trigger participants to “step on the gas” by activating the reward networks in the brain, creating a strong desire to spend more and to ignore the costs of the product.
Furthermore, the researchers did not find that cash purchases activated the reward networks in the brain.
The research also suggested that different types of credit cards triggered different neural responses. Therefore, this caused differences in spending behaviour e.g. the credit card used to buy petrol would not cause the same desire for spending as the credit card used to pay for holidays.
The researchers also said that understanding the effect of credit cards on the reward networks of the brain and the cue to spend more could be useful when trying to understand how and why any new payment technology, such as smartphones, could impact the brain and associated spending behaviour.
Take Your Foot off the Pedal
Credit cards act to “step on the gas” to increase spending by activating the reward networks in the brain, while cash purchases do not.
Newer payment methods, such as via a smartphone, may exploit the impact on the reward centres of the brain in the way credit card spending does, to encourage people to spend more.
Perhaps a way to tackle overspending and to help a person who is a shopaholic is for them to cut up their credit cards, transfer the balance to a 0% interest credit card, pay the balance off over time and use cash only. That way they will feel the ‘pain’ of their hard-earned cash leaving their purse or their account and they can only spend the cash that they have in hand.
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