Does the Use of Credit Cards Rather than Cash Leads to Increased Spending?
There are various payment methods which have been developed to be used by the consumers at different points of sale such as, petrol stations, restaurants, and shops. The most common methods of payments are; cash, debit and credit cards. The consumer’s choice on the mode of payment, however, depends on various factors such as the size of the transaction, acceptance of payment by retailers, and the type of merchants. Several studies in the past have paid attention to the role of spending and budget control in consumers use of payment instruments (Heath, and Soll, 1996).
In this digital age, credit cards are increasingly being utilized as a means of payment in place of cash. Discussions about this increasing utilization of credit cards rather than cash have gained steam over the current perspective. Furthermore, the arguments have been heightened particularly among those who have been adversely affected by the credit card debt. The greatest fear of this credit card era has been the debts, generated by the technology (Bertaut, et al, 2008). . The argument is premised on the logic that if there were no credit cards, then there would be no credit card debts. Psychologically, it may also appear that an individual has a more likelihood of spending more money using a card since despite it being tangible does not represent real money. Many consider it as a piece of plastic and consequently, a buyer may not perceive the immediate result of his or her expenditure for some time. However, some analysts have presented diverse opinions pointing out the benefits of credit cards over cash (Borzekowski, 2008). It is therefore, the purpose of this study to establish whether the use of credit cards leads to increased spending as compared to the use of cash.
According to Fusaro (2008), consumer’s choice of payment is influenced by various factors such as the availability of payment terminals, financial incentives and the amount of transaction. Further, the selection of the payment option is also influenced by psychographic and demographic factors such as education income and age. The role of budget plays a crucial role in the choice of what payment method one selects. For instance, in 2013, the purchasing power across Europe had declined for the previous four years. The reasons for this decrease are as follows; the pensions had been under pressure, rising taxation and inflation, rising levels of unemployment, wedges, and retirement. To deal with the lower purchasing power, the household members had to monitor and cut unnecessary spending. However, with the widespread introduction of credit payment cards, and easy access to internet banking, alongside the introduction of mobile banking apps, the consumers spending opportunities increased due to the flexibility of the credit cards as a payment system.
According to Ameriks et al. (2004) explains that, the consumer behavior in expenditures depends on the assumption that the consumer desire for both “immediate spending of income” and “long-term planning and investments.” Therefore, the user needs a means that can control his or her spending. In respect to this, the authors proposed two unique mechanisms to monitor spending.
1. Monitoring behavior, for example, tracking expenses
2. Setting out clear constraints, for example, periodical budgets
However, advances in technology have significantly increased the ability to keep up to date with the consumers spending records. With cash payment, the consumer has to memorize his spending, but for card payment, the user can easily monitor their spending either by asking for a bank statement from their respective banks. Payment cards vs cash payments differ in their ability to provide information or expenditure. For instance, in the case of cash payment, traces of payment are rare as opposed to card transaction where individual transactions are recorded in the account statements. Payment in cash minimizes the chances of over-spending in that the consumer only withdraws the amount of cash needed in a particular transaction. This is unlike card payments where spending limits will need to be set by the mind, otherwise, the consumer to spend with little to no boundaries. Furthermore, so as to know how much funds are left on the card for spending, the card owner has to consult their respective banks.
Borzekowski et al., (2008) argues that, the desire for spending controls and budget makes consumers shy off from credit cards. The authors continue by saying that most users would prefer cash for restraining from overspending and keeping in touch with their volume of spending. According to these authors, the avoidance of credit cards by many consumers owes to the fact that it leads to impulse buying in a higher degree when compared to the use of cash. The author goes on to explain that impulse buying is related to unhappiness and anxiety whereby; the impulse buyer will develop the feelings of unhappiness and may think that if he or she buys costly purchases, then this will bring respect, admiration and happiness. This perception will make the user feel motivated just by the thought of being able to acquire what he or she wants immediately and possess it sooner than later.
This literature showcases that the choice for a particular payment option, whether cash or credit card is influenced by various factors. These includes but not limited to availability of payment terminals, financial incentives and the amount of transaction. Other factors include psychographic and demographic factors such as education income and age. The use of Payment cards vs a cash payment differs in their ability to provide information for expenditure. While a user can immediately feel and perceive the amount of cash used in spending, it is not so with the use of credit cards. Consequently, one would end up using more in credit cards than in cash payments. Payment in cash minimizes the chances of over-spending in that the consumer only withdraws the amount of cash needed in a particular transaction. This is unlike card payments where spending limits will need to be set by the mind; otherwise, the consumer will have no boundaries of spending. What is more, in order to know how much funds are left on the card for spending, the card owner has to consult his or her respective banks. In respect to these, most users would prefer cash for restraining from overspending and keeping in touch with their volume of spending.