Do credit cards make you spend more?

Quick insights

• Thanks in part to the psychological effect of making purchases without immediately needing to pay for them, credit cards might possibly encourage consumers to spend more money.
• It can be helpful to understand the potential disadvantages of credit card usage to help reduce or eliminate them before they happen.
• Strategic, informed use of credit cards can offer many benefits that justify their place as many shoppers’ preferred payment method.

According to numerous studies, credit cards have surpassed cash as the preferred payment method of most U.S. consumers. Credit cards are typically seen as more convenient and secure than carrying and paying with cash, and they are even ranked as a preferable option to debit cards.

While there are many benefits of using a credit card, there are some drawbacks, including evidence that they might make people spend more.

The psychology of spending money

Credit cards can cause you to spend more, and it’s not just because of interest payments or credit card fees, nor is there any rule or mechanism that requires people to spend more with a credit card. Instead, it all boils down to the psychology of shopping. Numerous studies have been conducted by universities, psychologists, marketing firms and more, and they tend to point to the same conclusion: using a credit card can lead to spending more, and more often, than shopping with cash.

Do credit cards actually make people spend more money?

Possibly, yes. In a 2023 study of 2,000 American adults conducted by Forbes Advisor and OnePoll, more than three of every four respondents reported preferring businesses that accept credit card payments to those that do not. Seven in ten reported credit cards as their most-used payment method. 52% reported that they are likely to make an impulse purchase when using a credit card versus 24% for cash, and 58% cited credit cards as the payment method most likely to entice them to spend more money – more than double the number for cash and more than eight times that of digital wallets.ec-forbes-cash-card

The Forbes study is not alone. Hong Kong University of Science and Technology Professor Dilip Soman’s research confirmed earlier findings that credit card users are more likely to overspend than those who use cash.ec-rotman-paymechjcr-pdf A 2021 MIT Sloan study explored how “credit cards activate the reward center of our brains and drive spending.” It found that credit cards triggered the “anticipation of pleasure in the form of a purchase,” which was not unlike how smelling cookies makes you hungry or how casinos “use a variety of cues to increase appetites for gambling.”ec-mitsloan-spending

Potential benefits of using a credit card

Credit cards have many benefits, including:

• Convenience: Carrying a single plastic or metal card might be seen as more convenient than a wallet with cash, especially considering certain locations and businesses no longer accept cash payments, such as airplanes and most online vendors.
• Safety/liability: A majority of participants in the Forbes survey reported feeling safer making purchases on credit cards than with cash. This might be because most credit cards offer fraud and liability protections in the event of loss or theft. Many credit cards also offer purchase protection and/or extended warranties in the event of damage, loss, or theft of recent purchases in select categories. All of this can add up to a greater feeling of safety when using a credit card.
• Credit history: Credit cards can allow consumers to build credit history and potentially even improve their credit score, provided they pay their bills on time and work to maintain a healthy credit utilization ratio. A strong credit score might help you qualify for other financial products, like a mortgage, premium credit card or lower interest rates.
• Rewards and benefits: Many credit cards offer rewards simply for making purchases, which might be harder to find with cash or debit cards. If you tend to make most of your purchases in specific shopping categories, it could be worthwhile to investigate credit cards that provide bonus rewards points in those areas. These points can add up over time and be redeemed in many ways, including cash back or statement credits, hotel and airline rewards and more. Many credit cards also come with additional built-in benefits, including fraud and purchase protections, travel benefits and more, depending on the card.
• Travel: There are a number of benefits to traveling with a credit card that tend not to be found when shopping with cash or debit cards. For instance, many credit cards waive foreign transaction fees. They can offer travel protections, including trip interruption insurance, car rental collision and theft insurance, lost luggage benefits and more.

Potential risks of increased credit card spending

Rather than avoiding credit cards, it can be helpful to evaluate the potential risks and come up with a plan to mitigate them. Here are some of the risks that may be associated with credit card use:

• Delayed payment/instant reward: One of the reasons researchers found people were more likely to buy more with credit cards is the psychological impact of a delayed payment that credit cards offer combined with the instant reward of the purchase. It may be psychologically satisfying to obtain something immediately, especially when the payment for it is not due right away.
• Debt-to-income ratio: Your debt-to-income ratio, or DTI, is the amount of debt you carry at any given time, relative to your current income. It is generally recommended that you strive for a DTI of 36% or less. Credit card spending might lead to a higher DTI than cash purchases, which can be damaging to your credit score. Whenever possible, you may want to pay off your credit card balance in full and on time each month to avoid interest charges, late fees, and a negative impact to your credit score.
• Credit utilization ratio: Credit utilization ratio refers to the percentage of your credit limit occupied by debt. For instance, if you have a credit limit of $5,000 across all credit cards and you currently have $1,000 of debt, you have a credit utilization ratio of 20%. Credit card spending could potentially lead to a higher credit utilization ratio, as the entire purpose of a credit card is to utilize credit. It’s generally recommended that you keep your credit utilization ratio at or below 30% at all times. A credit utilization ratio above 30% could hurt your credit score.
• Credit score impact: Your credit score is calculated using a complex formula made up of many different variables. Credit card usage could impact your credit score in both positive and negative ways, depending on your use. While late or missed payments and a high credit utilization ratio can lower your credit score, a history of on-time payments and a credit utilization ratio below 30% may improve it.
• Decreased lender approval: Your likelihood of being approved for future loans could be negatively impacted by irresponsible use of credit cards, including poor payment history, high DTI or credit utilization ratios, and more.

Ways to control your credit card spending

Now that we know the risks associated with credit card spending, let’s look at some ways you may be able to minimize and address them:

• Budgeting: One way you may be able to mitigate the financial risks of credit card use is to make a clear budget that accounts for both your spending habits and your income. In this way you might be able to more easily resist the urge to spend more than you can afford.
• Free online tools: There are a number of free tools available to help you with budgeting and financial planning, including Chase Credit Journey and Budget Planner.
• Mindful spending: By keeping your budget in mind and avoiding making purchases without thinking, you may be able to help reduce the potential drawbacks of credit card use. In a best-case scenario, your credit card can and should function like a debit card with added benefits. By avoiding spending more money than you can afford and striving to pay off your debt on time and in full each month, you may be able to maximize the benefits of credit card use while potentially avoiding the risks.
• Know your card(s): Reading and understanding terms and conditions, card benefits, interest rates, etc. can help you to make the smartest, most strategic decisions regarding their use.

Bottom line

Multiple studies have shown that credit cards are most shoppers’ preferred payment method and that using a credit card can lead to spending more than using cash. But this popular payment method can offer many additional benefits, including travel perks, purchase protection, added convenience, rewards points and more. By understanding and trying to reduce the risks of credit card usage, sticking to a budget and engaging in mindful spending, card members could potentially enjoy the benefits of their cards while working to reduce overspending.