Credit Cards Cost, No Matter What

For example, 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. The cash limits your spending capacity.

However, if you take and use a credit card, even with your resolve to stay within the $20 limit, the plastic makes it easier to break that promise.

Peter Tufano, a professor of financial management at Harvard Business School, has found in his research 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 found in one study aimed at marketers that customers using credit cards spend more than those paying with cash or checks in purchasing situations that are otherwise identical in every other respect.

"This customer behavior is at odds with standard economic theory, which argues that the method of payment should have no effect on spending, so consumers seem to be indulging in 'irrational' behavior,' " Davies says in a research article, "The Realities of Spending."

Davies explains that credit cards boost spending because of the psychophysics of how our brains work. He found that credit cards reduce the pain of payment because:

· Paying for the product or service is put off when you use plastic. Therefore, we don't do the same mental accounting as we do when we pay with cash.

· When several things are bought on a credit card at one time and paid for in a single transaction, there is no clear signal that we may have overspent on any one of the items.