Why Credit Cards Make Us Spend More

Yes, that's right. Credit Card does make us spend more and number of economic and behavioral studies point to this fact.
  • A study conducted by Dun & Bradstreet found that people spend 12-18% more when using credit cards instead of cash. 
  • McDonald’s reports its average ticket is $7 when people use credit cards versus $4.50 for cash.
  • A 2001 study titled “Always Leave Home Without It" by Drazan Prelec and Duncan Simester concludes that willingness-to-pay can be increased when customers are instructed to use a credit card rather than cash. 
However, the deeper question which we are trying to answer here is the "Why" part of it. Why do credit cards make us spend more?

A very interesting and relevant study in this field, The Red and the Black: Mental Accounting of Savings and Debt, touches upon some of the following very insightful aspects:

The Pain Of Paying
According to the study, when people make purchases, they often experience an immediate pain of paying. This "pain" can undermine the pleasure derived from consumption. Relate to how the ticking of the taxi meter can reduce one's pleasure from the ride.

Coupling of payment and consumption
Coupling relates to the degree to which consumption makes you think about the payment for that consumption. Payment methods like cash payment produce a tight coupling between a more involved payment method leading to thoughts about associated benefits being consumed. On the other hand, financial methods like credit cards tend to weaken this coupling as the payment process is less involving.  

Prospective mental accounting due to different sequence of payments and consumption
The study shares that consumption that has already been paid for, can be enjoyed as if it were free and that the pain associated with payments made prior to consumption is buffered by thoughts of the benefits that the payments will finance

Prospective accounting concept is also proven in another study which states that credit cards make us focus on Product Benefits Vs Cost. This 2012 research by Promothesh Chatterjee and Randall L. Rose observed that consumers who use credit tend to focus on the product’s benefits as opposed to their costs. Here is the abstract of the research and full study available here

"We argue that consumers for whom credit cards (cash) have been primed focus more on benefits (costs) when evaluating a product. In study 1, credit card (cash) primed participants made more (fewer) recall errors regarding cost attributes. In a word recognition task (study 2), participants primed with credit card (cash) identified more words related to benefits (costs) than those in the cash (credit card) condition. In study 3, participants in the credit card (cash) condition responded faster to benefits (costs) than to costs (benefits). This differential focus led credit card primed consumers to express higher reservation prices (studies 1–3) and also affected their product choices (study 4) relative to those primed with cash."

These studies bring forth and prove some psychological facts which I am sure all of us experience are but seldom able to acknowledge. However, businesses and marketers already use many of these insights while pricing products as well as recommending preferred payment methods. So the next time you see a message by your favorite e-commerce app to save your your credit card details for easy purchase processing or 1 click orders, you know why you are being asked to do so!