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Mybudget
Why we spend more with cards
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By MyBudget Editor

Have you ever wondered why hotels make charging expenses to your room so easy? Or why the barman offers to open a tab for you? Or why retailers so keenly promote ‘buy now pay later’ deals? Underneath the advertising and “convenience” hype, there’s an entire field of applied science that studies the psychology of paying and seeks to understand why some payment methods make us spend more. In this article, we explore the science and how to use it to your advantage.

Plastic is fantastic, if you’re a seller

Imagine you order a sandwich in a deli and the cashier says to you, “That’ll be $9.50, please.” As well as the brain activity required to reach for the $10 note in your pocket, psychologists say that there is a moment of mental pain triggered by the act of parting with your money. This loss aversion and the psychological pain it triggers is considered one of the key features in how individuals regulate their own spending habits.

No surprisingly, psychologists have observed that we experience less pain as the mode of payment becomes more abstract. Whether it’s toy money or tokens, such as casino chips, even when study participants are told that the tokens will be converted into real cash later, they spend more than they would if paying with cash.

Likewise, numerous experiments comparing people spending with cash versus with a credit card have demonstrated that people are willing to spend more when they pay with cards. It seems that the more abstract the notion of money is, the less likely people are to appreciate its proper value. Therefore, they experience less loss aversion and less pain.

Taking the pain out of paying

Now, imagine that same deli sandwich again, but instead of having a price assigned to it, buyers are asked to nominate its worth. When compared with people who pay with cash, studies show that buyers who pay with cards are 1) more willing to buy and 2) more willing to pay higher prices. In other words, those paying with a card are willing to pay more for their sandwich.

This is what merchants and credit card providers strive for when they refer to “frictionless” payments. We’ve already witnessed a flurry of new frictionless payment technologies in recent years, from Paywave, to Apple Pay on smartphones and smart devices, to PayPal on the internet.

Some experts even go so far as to predict that the future of frictionless payments is biometry, where our payment details are linked to our fingerprints, retinas or the unique pattern of veins in our wrists.

Use the psychology of paying to your advantage

The same ‘payment pain avoidance’ principle that applies to paying with cards also applies to ‘buy now pay later deals’, such as Creditline interest-free offers and Afterpay. Retailers are willing to pay big commissions to the companies that finance these deals because they know that consumers will spend higher amounts and buy more often.

Luckily, you don’t have to be a scientist to recognise this effect in your own life, but you do need to be mindful about using tactics to counteract it. Firstly, a lot of us are so customised to paying with a card that we’ve become disconnected from the real value of money.

To reconnect, it’s as simple as taking a break from your cards and using cash for one whole month. Withdraw your budgeted living expenses (groceries, petrol, bus tickets, spending money etc.) from the bank once a week and you’ll soon discover that the cash in your purse or wallet is a strong reminder about how far your money needs to go. When it means swapping a $10 note for a sandwich and 50-cents of change, it suddenly makes sense to bring your lunch from home.

Another good strategy is to set yourself financial goals to strive for. When we’re goal oriented, the value of money becomes more apparent and the temptation to impulse spend decreases because we have our sights set on bigger, more important dreams. For example, once you set yourself the goal of saving for, say, an overseas holiday, it helps to clarify that your Friday night pub habit is costing you $2,500 a year or the equivalent of a New Zealand ski trip.

When it comes to making big purchases, you may even be able to use your awareness of payment psychology to your advantage. Approach retailers with the knowledge that merchants are paying up to six percent commission on services such as Afterpay. (Afterpay allows shoppers to break down purchases into smaller instalments—read our article about it here.)

Instead of being lured into a ‘buy now pay later’ deal, save up for the things you want and then shop for a cash discount. On a $2000 fridge, you could save $120 or more, which can go a long way towards filling it with groceries.

Don’t be a debt bunny

Psychologists also point out that some people are more susceptible to being lured into ‘buy now pay later’ deals than others. There’s a cluster of quick loan companies and ‘buy now pay later programs’ that promote themselves with edgy ad campaigns and slick apps angled at young people.

In one ad series, a man dressed in a rabbit suit turns up right as a twenty-something’s electricity or mobile phone bill is due. “Nimble it and move on,” he counsels and refers to the product as “smart little loans.” Be aware of these marketing techniques and mindful not to buy into the trivialisation of debt and its consequences.

The crux of the matter is that payment pain is unavoidable, even more so if your payments come with interest charges or late fees. The more reliable way to reduce payment pain is to get financially fit through budgeting. It may not sound edgy or involve a grown man in an animal costume, but the simple principle of budgeting to live within your means is the ultimate money hack.

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