Credit Cards: The Psychology Behind the Plastic

21 July 2017

Studies have shown it’s psychologically easier to overspend with credit cards. The act of swiping a credit card is mindless: swipe, sign, and you’re done. Paying with cash, on the other hand, can be a little more painful. Physically departing with your hard-earned cash can be tough and make you think twice about your purchase. Credit card spending also desensitises you from the reality of spending and actually incites desire to consume.

Paying with a credit card has many benefits, but appreciating the value of money isn't really one of them. When the actual money is virtual, represented solely by a line on a screen, and the process of making a purchase is a quick swipe or a tap, it feels less real and less precious. The subtle psychological effects of using credit cards may get even more powerful as technology develops ever more seamless and painless ways to pay.

However, the psychological danger of credit cards are often underestimated, the urge to pursue goals closest to completion drives people to focus on repaying small debts first, regardless of interest rates. The development of convenient payment methods is not a bad thing, like most technology, it can be used for good or for bad.

A recent study shows that the shopping baskets of those who paid with credit cards had a larger proportion of impulsive and unhealthy food items. Would a cash only diet save our pockets and waistlines?

Cash Only Diet

Just a decade or two ago, the majority of people used cash for most things. But today, a vast majority of Europeans make purchases with credit or debit cards. Customers who pay with cash enjoy a better relationship with their purchased products while the payment method also affect the shopper’s relationship with the purchased product.

Cash users are also less interested in the options they did not select. Instead they publicly signal their commitment towards the item they did purchase. Furthermore, cash users are more loyal and there is a higher possibility of repeat purchasing. In the context of donations, cash users are 9.9% more likely to donate again over the course of a year than those who donated using a credit card.

The average cash payment in Ireland is €18, compared with about €50 for debit cards and about €80 for personal credit cards and €142 for business credit cards. Cash also accounts for a higher number of transactions; 491 per head compared with 148 transactions for debit card payments and 34 credit card payments. Cash is key, but are credit cards the preferred method to cash transactions?

Contactless Payments on the rise

Irish consumers have firmly embraced contactless payments with usage having almost tripled over the last year. On average, five contactless transactions are being made with debit cards every second in Ireland. The biggest users of contactless were 30 to 39 year-olds, with Dublin accounting for 43% of the volume of payments. What’s more, the top five items we pay for using contactless payments are food and groceries (75%), fuel (23%), alcohol (21%), clothes and shoes (21%) and newspapers and magazines (17%).

Additionally, you can also use a contactless card to make payments outside Ireland.  One place where they are very convenient is on the London underground and other public transport in London. All London buses and tubes accept contactless cards, you just swipe them at the ticket barriers and the relevant charge is debited from your account. Using contactless payments has changed how we spend, but how safe are credit cards and contactless payments?

Credit Card Fraud, Who Pays?

‘Card not present’ (CNP) fraud can happen when a criminal obtains a cardholder’s name, billing address, account number, three-digit security code and card expiration date. These details can be stolen electronically without actually accessing the physical card. The theft of this data usually takes place through online phishing.

People are increasingly choosing to shop online with Irish consumers now spending €850,000 every hour in online sales. Card fraud totalled €29.6 million in Ireland in 2015, with 70% of this falling into the ‘card not present’ category: online or phone purchases. In the first half of 2016 there was €20.8 million worth of card fraud in Ireland, 78% of this was down to CNP scams.

ATM card “skimming” is another one of the most common types of fraud in Ireland, with thousands of people all over the country affected by it. Those perpetrating the crime tamper with an ATM machine so that when you go to withdraw money, the magnetic strip on your card is copied by a device called a “skimmer”, which has been attached to the machine. Small cameras are attached to the ATM so that the criminals can get a record of your pin number, which means they can make copies of your card and withdraw money from your account.

Considering the above statistics, who compensates those who have been affected by fraudulent activities? Fraud losses are usually shared between card issuers and merchants. The issuer has historically been stuck with about 60% of the loss, with almost all the rest going to the merchant. It’s rare the cardholder is not compensated.

Final note

Why do we use credit cards? Because they provide us with a venue to look past the cost of an item and simply see it for its benefits. This is arguably a state of naivety, but it allows consumers to feel better about spending money. Convenience, conformity, rewards, and security all play a role in credit card use.

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