I stumbled across a Carnegie Mellon paper that attempted to specifically examine the impact of credit cards on spending, and that controlled for many of the pitfalls from earlier studies. Two economics professors, Elif Incekara-Hafalir and George Loewenstein, ran an experiment in a cafeteria over several trials to test the impact that credit cards had on spending. Before entering the cafeteria, consumers in the treatment group were offered a choice of two different coupons: one offered an $8 Amazon gift card if paying with credit, and a $5 Amazon gift card if paying with cash. (The control group was not offered a choice.) To redeem the coupon, the consumers had to provide the receipt and fill out a survey.
The study was unique in several ways: for one, it was a randomized experiment being run in a real life consumer situation. And liquidity concerns were mitigated by surveying participants' financial situation, and also because the purchases were so small. It was unlikely that cash buyers were paying less for lunch simply because they had insufficient funds available, and that could be teased out from one of the survey questions: ("About how much cash do you have with you right now?").
The findings from the experiment are surprising and run contrary to the belief that credit cards induce higher spending. For the short version, here is the abstract:
In a field experiment, we measure the impact of payment with credit card as compared with cash on insurance company employees’ spending on lunch in a cafeteria. We exogenously changed some diners’ payment medium from cash to a credit card by giving them an incentive to pay with a credit card. Surprisingly, we find that credit cards do not increase spending. However, the use of credit cards has a differential impact on spending for revolvers (who carry debt) and convenience users (who do not): Revolvers spend less when induced to spend with a credit card, whereas convenience users display the opposite pattern.
For one, I was somewhat shocked to see that credit cards didn't increase the overall spending when compared to cash buyers. Most of what I've read from personal finance blogs indicates that plastic is likely to change purchasing behavior, and for the worse. Older studies point to the fact that simply seeing a credit card logo might increase the figure a customer would be willing to pay for an item by several hundred percent. But as someone who does nearly all his purchases on a credit card, it was a relief to see this result. I might actually be pulling one over on the credit card companies, and getting free money via rewards without increasing my baseline spend. Go me!
But within the overall "equal" spending of credit card users is a strange anomaly. Again, quoting from the paper:
The numbers just reported hide an interesting pattern, a difference between participants who report carrying a credit balance (“revolvers”) and those who do not (“convenience users”). Figure 1 illustrates the nature of the difference; it suggests that the treatment, which encouraged diners to pay with credit cards, increased the spending of convenience users, but decreased the spending of revolvers.
The authors caution that broad conclusions shouldn't be drawn from this study, since it is one of the first randomized experiments on the impact of credit cards on spending. They cited the possible effect of the coupon: that credit card users might have felt manipulated by the offer of the Amazon gift card and might have been especially careful not to spend more as a result. Additionally, the timing of the experiment in 2008 and 2009 may have impacted the results as it took place in the middle of the recession, with many consumers having a negative view of consumer debt. So there are reasons to hold off on making broad conclusions from this study, and for waiting for additional research.
But if you can't jump to hasty and unreasonable conclusions on an anonymous personal finance blog, then where can you? As someone who pays off his credit cards each month (which I imagine is typical of the readers of this blog), is it possible that my behavior mirrors that of the "convenience users" in the study, and that I may be especially prone to spend more with a credit card? Or is the general finding of the study more applicable? That credit cards don't actually induce higher spending than cash, so we should confidently move forward, churning rewards cards and reaping the benefits.
What say you, readers? What do you take away from this experiment?
Photo is from shawnzrossi at Flickr Creative Commons.