Financial therapists or money coaches frequently advise first considering how you deal with money at a basic level, such as when it comes to using credit cards instead of cash, whether you’re trying to manage excessive spending or increasing credit card debt.
One drawback of using your credit card more frequently for ordinary purchases is that it sometimes feels like you aren’t actually parting with cash or your debit card, as opposed to when you use cash or swipe your debit card.
Additionally, a growing body of academic research from throughout the world demonstrates that when using a credit card to make a transaction, people priorities its advantages rather than its cost. Here is a look at the mentality that underlies utilizing both and how it can result in inadvertent expenditure.
Do you place more emphasis on a purchase’s advantages or costs?
The ‘credit card premium’—the unintentional willingness of people who use credit cards to spend more than those who pay with cash—is well-established in the field of behavioral economics.
According to Matthew Griffin, a behavioural economist based in the UK, the ‘credit card premium’ phenomenon arises as a result of an emotional pain associated with handing over hard currency that curbs spending, as opposed to mindless purchasing when handing over the plastic card instead.
It teaches even financially responsible people a valuable lesson: Just because you pay off the balance on your credit cards each month to avoid finance fees doesn’t imply that using them isn’t hurting you. Simply because of the payment option you use, you can be overspending.
Numerous research on consumer spending undertaken by prestigious colleges, like the Massachusetts Institute of Technology in the US, Harvard, and the University of Oxford in the UK, have demonstrated a direct correlation between the usage of credit and increasing expenditure. MIT is the source of one of the more well-known research.
Gryphon continued by saying that, in light of this difficulty, it is crucial to know when one should cease using a credit card. There were a variety of responses when a few UAE citizens were questioned if they had observed their expenditure rise when using their credit cards rather than cash.
Engineer Jeremy Davies, 36, of Dubai said that he tends to overspend when using his credit card and that he has subsequently moved to using cash more frequently, while Sharjah-based real estate broker Jaimy Thekkethu denied doing so because she uses a combination of credit and debit cards as well as cash.
When you pay with a credit card, you might notice that it feels different from when you pay with cash; when you swipe plastic, it might not even feel like you’re spending actual money. The ‘credit card premium’ phenomena then emerge as a result.
The question of “Is it better to pay with cash or a credit card?” may not be as straightforward when it comes to purchasing something.
“Being aware of the behavioral tendencies, particularly when it comes to individual spending patterns can help you spend wisely and balance using a credit card and cash appropriately,” Gryphon continued.