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THE COLOR OF MONEY | MICHELLE SINGLETARY

Plastic makes it too easy for consumers to spend more than they planned

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May 23, 2008

I should have known: Call people suckers and they'll take offense.

Folks were either confused or offended when I said recently that we are all suckers - that is, losers - when we use credit to pay for services and goods.

"I'm very perplexed," wrote Tim McCune of Germantown, Md. "If we pay off all monthly credit card balances . . . and we get affinity benefits, how am I losing money and why are we suckers?"

"I do not understand your argument that anyone who uses credit cards is a chump, even if they pay their balances off in full every month," another reader wrote. "I can assure you that I make the same purchases and contributions, with credit cards, that I would make without them."

I'm reasonably sure many people do not make the same purchases when they pay with plastic. Researchers have found that people's willingness to purchase more products or services increases with the use of plastic. The Sloan School of Management at MIT found that subjects paid more when instructed to use a credit card. They found people were willing to pay up to 100 percent more with plastic.

So have I thrown a net too widely in arguing that we are all suckers? Nope. Net tossed just right. You have to admire the marketing might. Credit card issuers have done an outstanding job of persuading otherwise smart people that using plastic can come with no price. Oh, there is a cost. You may be able to bear it, but there is an extra cost.

Let's say you decide to go out to eat with friends. You vow beforehand that you are only going to spend $20 and that's all you take in cash to the restaurant. You leave home without the credit card. However, if you take and use a credit card, the plastic makes it easier to break that promise.

Peter Tufano, a professor at Harvard Business School, has found that transaction credit card users - those who pay their bills off every month and who are not overly indebted - are more financially literate. "Their credit card purchases are under control," Tufano said. "But that is not to say that they are spending less."

Greg Davies at Britain's Warwick University explains that credit cards boost spending because of how our brains work. He found that credit cards reduce the pain of payment because:

Paying is put off when you use plastic. Therefore we don't do the same mental accounting as with cash.

When we buy several things on a credit card at one time, there is no clear signal that we may have overspent on any one of the items.

Cash is a visual clue that money is being spent. And while checks don't have the same effect, writing down the amount imprints on your brain that you are letting go of some cash.

If you don't believe the research, try this: For one month, don't use a credit card. After the month is over, compare your spending with the previous month's, when you used credit.

Michelle Singletary is a columnist for The Washington Post.

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