Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation

Payment Rewards and Credit Card Debt: Experimental Evidence

We report on a controlled laboratory experiment in which participants make consumption, saving, and credit card repayment decisions when credit card purchases e

Rewards and Misperceived Spending: Experimental Evidence from Credit Cards

Using proprietary data, a survey, and an experiment with a major bank in China, this paper studies how credit card rewards affect perceived and actual consumer

The Impact of Credit Cards on Spending: A Field Experiment

In a field experiment, we measure the impact of payment with credit card as compared with cash on insurance company employees' spending on lunch in a cafeteria.

Time to Cut Up Those Debit Cards? Effect of Payment Mode on Willingness to Spend

Financial industry data indicate that consumers increasingly prefer debit cards over credit cards, especially as a means of enforcing financial self-discipline. Given prior research suggesting that credit cards act as spending facilitating stimuli, this move toward reduced credit card use would appear to be in the right direction. Ironically, however, the same logos that were implicated in facilitating spending with credit cards are the logos that appear on debit cards. In what should serve as an eye-opener to consumers, it is found that exposure to debit card logos does result in an increased willingness to spend, similar to credit cards.

Managing Mental Accounts: Payment Cards and Consumption Expenditures

Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously received a new credit card, without requesting one. Using random variation in the time of receipt we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by models of mental accounting and narrow bracketing.

Purchase Justifiability Drives Payment Choice: Consumers Pay with Card to Remember and Cash to Forget

AbstractAlthough consumers often have multiple payment methods at their fingertips, such as cash and credit/debit cards, prior research is silent on how consumers choose between them. We home in on a key element of purchase—purchase justifiability—that affects how consumers choose to pay. Analysis of 118,042 real-world purchases and six experiments reveals that when consumers are motivated to forget (vs. remember) a purchase because they see it as difficult (vs. easy) to justify, they have an increased preference to pay with cash (vs. card) because cards create a “paper/electronic trail” that aids memory retrieval. These payment preferences are strongest among consumers most likely to recall/track their card spending, and manifest only when card expenses are trackable. We reconcile our results with the classic effect of payment method on pain of paying and discuss implications for merchants and for financial institutions designing payment methods of the future.

Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments

Abstract. Past expenses have been shown to influence future spending behavior by depleting available budgets. However, a prerequisite for this relationship

The Effects of Prior Spending on Future Spending Decisions: The Role of Acquisition Liabilities and Payments

Research in mental accounting shows that prior spending influences a consumer's decision to make a new spending decision (Heath and Soll 1996, Soman 2001). In particular, greater spending in a particular category reduces the likelihood of further spending in that category. In the present research, we decompose “spending” into two distinct episodes—the acquisition liability episode during which a purchase is made accompanied by a commitment to pay (e.g., using a credit card) and the payment episode during which the consumer's wealth actually gets depleted (e.g., paying the credit card bill). Using a controlled laboratory experiment and real world data from a group of consumers, we replicate earlier findings that prior spending influences a pending spending decision, but also show that the location of both the acquisition liability episode and the payment episode play a role. Our results contribute to an understanding of the dynamic mental accounting of acquisition liability and actual outflows.

Cash versus Debit Card: The Role of Budget Control

Due to the financial crisis, an increasing number of households face financial problems. This may lead to an increasing need for monitoring spending and budgets. We demonstrate that both cash and the debit card are perceived as helpful in this respect. We show that, on average, consumers responsible for financial decision making within a household find cash and the debit card equally helpful for monitoring their household finances. Individuals differ in major respects, however. In particular, low earners and the liquidity‐constrained prefer cash as a budgeting tool. Finally, we present evidence that at an aggregated level, such preferences strongly affect consumer payment behavior. These findings suggest that the substitution of cash by cards may slow down because of the financial crisis.

Managing Mental Accounts: Payment Cards and Consumption Expenditures

Abstract Does mental accounting matter for total consumption expenditures? We exploit a unique setting in which individuals exogenously receive a new payment card, without requesting one. Using random variation in the time of receipt, we show that individuals temporarily increase total consumption expenditure by making purchases with the new card without reducing spending on the others. We do not observe a corresponding increase in indebtedness. Total consumption expenditure rises even for the least liquidity-constrained individuals. The evidence is consistent with consumers treating methods of payment as nonfungible budget categories, as suggested by models of mental accounting and narrow bracketing.

Leave Home without it? The Effects of Credit Card Debt and Available Credit on Spending

This research examines how credit card debt affects consumer spending. In five experimental and field studies, the authors demonstrate that outstanding credit card debt increases spending for consumers with high self-control. They also show that this effect can be eliminated by increasing the available credit on the credit card. Thus, when the available credit is low, consumers with greater self-control increase spending, but when the available credit is high, they reduce spending. The results extend the literature on goal violation and self-control and offer insights into consumer decision making and consumption patterns under conditions of debt.

Do Payment Mechanisms Change the Way Consumers Perceive Products?

Abstract. Do payment mechanisms change the way consumers perceive products? We argue that consumers for whom credit cards (cash) have been primed focus mor

Knowing When to Spend: Unintended Financial Consequences of Earmarking to Encourage Savings

Maintaining savings is an important financial goal. Yet there are times when savings should be spent, such as when people face unavoidable costs, and spending their savings allows them to avoid high interest rate debt. Existing behavioral research has focused on consumer decisions between savings and discretionary spending and has proposed interventions to promote savings in these contexts. However, when spending is not discretionary, such interventions could risk exacerbating a pattern found in economic research in which people borrow high interest rate debt while maintaining savings that earn low levels of interest. To examine how mental accounting interacts with considerations of personal responsibility and guilt to contribute to this pattern, this article explores whether people spend their savings when they need money most: during emergencies. Six studies reveal that people's tendency to preserve savings by borrowing from a high interest rate credit option varies as a function of the savings’ intended use. Paradoxically, people are most likely to turn to high interest rate credit with the belief that doing so is the responsible option.

“Repayment-by-Purchase” Increases Consumer Debt Repayment

This article tests the effect of a novel credit card payment format—repayment-by-purchase—on consumers’ payments toward credit card debt. In contrast to typical balance repayment, where consumers make repayments relative to a total amount owed, repayment-by-purchase prompts consumers to select items (e.g., a Starbucks coffee) or categories of purchase (e.g., restaurant and café purchases) and to make payments toward their related debt. A field experiment first suggests that customers who opted into repayment-by-purchase paid 12.18% more toward their statement balance than a control group. Subsequently, five lab experiments show that consumers repaying-by-purchase increase repayment by an average of 22.47% over typical balance repayment. Process evidence suggests that these differences may be driven by repayment-by-purchase's power to increase purchase salience, which in turns increases perceptions of progress toward reducing debt. Consistent with this theory, the effect of repayment-by-purchase on bill repayment emerges regardless of whether consumers repay durable versus nondurable goods, and for specific items or categories of purchases, as long as the bill uses labels that are concrete enough to raise past purchase salience.

Gift Cards and Mental Accounting: Green‐lighting Hedonic Spending

ABSTRACT In three studies, we examine the mental accounting rules that govern how gift cards are used. We predicted that their identity as gift cards would shift consumption from utilitarian to hedonic goods even in contexts where both types of goods are available and the consumer's needs are unchanged. In Study 1a, participants were asked to imagine that they had both a gift card and a specified amount of cash and needed to purchase both a hedonic item and a utilitarian item. When asked which currency they would use to buy which item, respondents were significantly more likely to say they would use the gift card to buy the hedonic item. Study 1b replicated this result and found that it was tied to participants' beliefs how different types of money should be used. In Study 2, we found that participants who were required to spend a certain amount of their compensation in a laboratory store spent more on hedonic goods if their payment was in the form of a gift card. In Study 3, we analyzed transactions at a campus bookstore and found that shoppers tended to spend disproportionately on hedonic goods when using their gift cards than when making credit card purchases. Taken together, these studies indicate that people tend to assign the monetary value of a gift card to a hedonic mental account and spend it accordingly. Copyright © 2014 John Wiley & Sons, Ltd.

The Red, the Black, and the Plastic: Paying Down Credit Card Debt for Hotels, Not Sofas

Using transaction data from a sample of 1.8 million credit card accounts, we provide the first field test of a major prediction of Prelec and Loewenstein’s theory of mental accounting: that consumers will pay off expenditure on transient forms of consumption more quickly than expenditure on durables. According to the theory, this is because the pain of paying can be offset by the future anticipated pleasure of consumption only when money is spent on consumption that endures over time. Consistent with this prediction, we found that repayment of debt incurred for nondurable goods is an absolute 10% more likely than repayment of debt incurred for durable goods. The strength of this relationship is comparable to an increment in 15 percentage points in the credit card annualized percentage rate. Our results have not only managerial implications for the structuring of financial transactions (e.g., that credit card customers should be given the option of paying off specific purchases) but also more general implications for exploiting variations in the pain of paying in incentive schemes aimed at customers and employees. This paper was accepted by Yan Chen, behavioral economics.