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The credit card delusion

By Janna Herron · Bankrate.com
Friday, November 25, 2011
Posted: 3 pm ET

If you're basking in post-Black Friday fracas euphoria (despite blowing your budget on the first "official" holiday shopping day), I bet you paid with a credit card.

Consumers focus on the benefits of a purchase -- while ignoring the price tag -- when they pay by credit card, according to a new article by professors Promothesh Chatterjee and Randall L. Rose in the Journal of Consumer Research.

On the flip side, consumers who shell out cash tend to zero in on the downsides of a purchase, such as cost, warranty prices, installation costs and shipping costs. These consumers are more likely to buy a lesser product to save money, while cardholders are willing to spend more for a better product.

Makes you rethink your holiday shopping strategy, doesn't it?

Researchers have long pointed to the so-called "credit card premium," the premise that consumers will spend more with credit cards than with cash. It backs the theory that physically doling out dollar bills is financially painful, while swiping a card makes it harder to imagine the loss of money.

In fact, the same journal highlighted research this past summer that showed consumers were more likely to buy junk food if they were paying with plastic rather than cash.

Still, many of these studies don't take into account the extra perks some issuers provide their cardholders, namely rewards. And this holiday season, many credit card companies are amping up how much cardholders can earn.

Of course, rewards may be just another way to explain away a bigger-than-expected purchase. In the end, whether you pay with cash or credit, stick to a predetermined budget before hitting the mall.

How do you pay for your holiday purchases?

Follow me on Twitter: @JannaHerron.

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3 Comments
Wolverine
November 29, 2011 at 8:40 am

Save First, awesome description and I wish people would understand that, but sadly... TONS don't.

"It's all about getting that Black Friday deal! It's so important! Forget being financially responsible, we want that TV!!!!!!!!!"

Ugh.

People.

Save First
November 26, 2011 at 1:10 pm

I also wish someone would explain to these consumers the "inverse compounding" that occurs. Much like a retirement account compounds to increase your savings, the same occurs in the opposite direction as carryover balances rise.

$5,000 at 18.5% with $100 payment would take 94 months to pay with total interest of $4,305 (almost double your purchase)

Now, tack on another $2,000 of debt.

$7,000 at 18.5% with $125 payment would take 125 months (2.5 more years!) to pay with total interest of $8,513 (MORE than double your purchase)

So enjoy the fact you saved 50% on the purchase price. You'll have paid the full price by the time it's paid for...many years later.

Ash
November 26, 2011 at 8:58 am

Credit cards are great tools, and sign-up incentives as well as 0% for X months can be very lucrative. But carrying a balance on any card that will result in finance charges shouldn't be part of anyone's credit strategy -- except perhaps in the case of a dire family emergency, but certainly not for ordinary consumer purchases. Also, I'm not convinced that the "credit card premium" is something that consumers are paying in this economy, and surely not during this holiday shopping season.