In 1979, economic and marketing theorist Elizabeth Hirschman first studied the “Cashless Effect”. According to SciTechDaily, the Cashless Effect “describes our increased willingness to buy products and to pay more for them when no physical money changes hands.”
In her first studies, Hirschman believed that people would spend more money when they paid via a credit card as opposed to making a cash purchase. To test her hypothesis, she had a team of interviewers survey customers shopping in different department stores. The interviewers asked customers about the products they had purchased as well as what method of payment they had used. Upon analyzing the data, Hirschman’s hypothesis was proven correct as she found that customers who used either store credit cards or a credit card spent a lot more money than customers who had paid in cash. She also found that customers who had both a store credit card and a regular credit card spent the most money.
Spend, Spend, Spend
SciTechDaily reports that people who use credit cards tend to spend more, are “less likely to recall their past expenditures, are more likely to focus on and remember product benefits — like product quality, features, looks, the social prestige of owning the product — rather than costs, and make more unplanned, indulgent, and unhealthy purchases. The effect is similar for people who use bank cards rather than cash.”
Research conducted after Hirschman’s seminal study in the late 70s largely supports this conclusion. In 1986, economist Richard Feinberg carried out a study suggested classical conditioning, which was backed by a study where volunteers were more willing to purchase goods and pay more for them if shown products with a credit card logo on the product. Feinberg suggests that there is an association between credit cards and spending, which is reinforced by positive associations of spending money to buy things.
An alternative hypothesis is that credit cards influence our purchasing behavior by making it less “painful” than when we spend cash. This is done by disassociating payments from purchasing, which means we get the joy of buying something new without the pain of having to pay for it right now.
Ways to Avoid the Cashless Effect
People who are worried about how the cashless effect might affect their bank accounts, there are ways to avoid the issue. If you are wanting to use a credit card in order to receive the points associated with purchases, you can pay off that purchase as soon as it is posted to your account. Additionally, leaving the credit card at home when you go shopping will help deter from unnecessary, additional purchases. Adding up the cost of items in your basket can also give you an idea of how much you are spending before going to the checkout counter. This allows for time to decide whether or not you really need the items you are about to purchase.
By committing to using more cash to purchase needed items, customers can help avoid overrunning their bank balances when it comes time to make a credit card payment.