Alright, so there are few universal truths in personal finance. The difference in spending patterns between people who use cash and those who use a card, credit or debit, is probably true—people who use plastic are more likely to spend more on average.
However, I’m not too sure if I can dig the statistics in whole.
In trolling Dave Ramsey’s site for more content (epic success, by the way) I found an article about how McDonalds saw orders increase by 47% when customers used credit cards.
To put it simply, and less accurately, for every $2 that a cash-user spends at McDonalds, a credit card user spends roughly $3. (It’s actually $2.94, but you get the point.)
Using stats like this really bothers me; this statistic hardly shows the full picture.
In the United States we have 56 million people who are known as the “unbanked.” In being “unbanked,” they run their lives on cash—they don’t have a savings account, checking account, or any of the various tools that are available to them. As a general rule of thumb, these people are lower-income, and generally poorer than your average American.
The “unbanked” make up roughly 17% of the population of the United States. I suspect that they also make up a greater percentage of McDonald’s transactions since McDonald’s is:
- Largely considered, in economic terms, an inferior good.
On the other hand, we have the “banked,” I guess you could call them. They have a savings account, maybe a checking account, and maybe even other financial products at their disposal—credit cards, lines of credit, and everything else including the kitchen sink. They make up the 83% of the population that isn’t “unbanked.”
According to the Federal Reserve Bank of Boston, 80 percent of consumers currently own a debit card, and 78% have a credit card. Basically, if you have a bank account, you also have access to some form of plastic.
Good Statistics, Bad Application: Seat Belts Cause Cancer
I can’t seem to wrap my head around the idea that the average cash-using shopper is the same as the average credit-using shopper. We’re not drawing very logical conclusions in insisting that the same people started to spend more once they could use plastic because we don’t even know if these are the same people.
We also didn’t discount for the realization that people who use cash are more likely to be “unbanked” and more likely to be poorer, or that people swap between cash and credit depending on their ticket size.
The assumption that credit card users spend more than cash users so credit cards must be the reason they spend more requires really faulty logic.
I can make a logically similar argument and say that seat belt usage causes cancer. Of course, seat belts don’t actually cause cancer–people who use seat belts live longer, on average, and living longer does increase your risk of getting cancer. But no one would stop using a seat belt because it causes cancer. That’s silly.
Spending more with credit
I’m sure people have a tendency to spend more when they use a credit card than when they use cash. I tend to savor my cash because I hate having to go to ATM. Additionally, I won’t always swipe a card for a purchase of less than $5 because I feel like a loser. So I use cash.
However, if it comes up to $10, I’m swiping it. I could say that when I use a credit card I spend two times more. But this is ridiculous. I spend the same amount—err, I intended to spend both $5 and $10–it’s just that when my ticket went over $10 I used my card. When it was only $5, I used cash.
So, in the end, people probably do lower their barriers to purchases with a credit card, but I have a really hard time believing that credit card use prompts a 47% larger purchase. This is correlation, not causation, and on small-money purchases like fast-food it’s infinitely biased by the fact that people don’t want to be a scrooge and swipe a $5 purchase.
We can’t ignore the bias in earnings, income, and data sample between the unbanked and banked spenders, either, though it’s probably unnecessary in getting to the bottom of why adding a credit card terminal increases per-ticket purchase amounts.