The Cost of Money: Cash or Card?

What was the last thing you purchased? A pack of gum, a t-shirt or half a dozen apples? How much did you pay for it?  If you remember the amount you paid, there’s a good chance you paid in cash. Why is that so? You’ll know the answer by the end of this post.

MY PAY PALS

I don’t use a credit card. Never have. Does that impact my credit score adversely? Perhaps, but that’s a conversation for another time or the comment section. The reason I’ve never wanted a credit card, despite being offered many over the years, is because credit cards allow you to spend money you don’t have. I abhor the idea of buying stuff on credit. I know I sound financially illiterate and more than a little old-fashioned but please bear with me.

While I do use debit cards, I’ve never stopped using good old cash. In India, we’re currently going through a period of looking down at cash in favour of digital payments for even small purchases like a glass of lemonade. I see the value of not having to dive into my wallet and waiting for change, but I believe that using credit or debit cards and digital wallets like Amazon Pay leave a far greater dent on your savings than using cash.

There’s something about pulling out your wallet, fishing out the right amount, counting it, handing it over and waiting for change that has a far greater psychological impact on us than merely scanning a QR code, punching in the amount and tapping a button. This psychological impact is called the “pain of paying”.

THE PAIN OF PAYING

The term “pain of paying” is based on the feeling of displeasure caused by paying for our purchases. Studies using neuro-imaging and MRIs show that paying stimulates the same parts of the brain that process actual physical pain. I dare say I could’ve told you that without the MRI!

You might think that this pain of paying applies only to expensive things. Nope. Any price will do. It’s not as much about the price as it is about giving up something we possess. Money, in this case. One needs to buy stuff with money since love and fresh air aren’t the best modes for barter! But if they were, we’d be loath to part with them too.

PICK YOUR PAIN: CASH OR CARD?

What we do get to choose is our form of payment. The trouble with using cash is that first, you need to have some in your account. Then there’s the inconvenience of withdrawing it and finally, the annoyance of pulling out your wallet, counting it and waiting for change. In contrast, a single swipe of your credit or debit card or scanning a QR code on your cell phone frees you from these hassles. But it’s not all hunky-dory. Cards and digital payment apps are just means for us to avoid pain in the present, often levying an even higher cost in the future. And I’m not referring to their sky-high interest rates.

SPENDING MADE SMOOTHER

Consider this. Making payments has become easier and easier over the last three decades. Why do you think that has happened? To make things easier for the customer? Or is to banish all bends in the road that result in a customer giving sober thought to whether or not, they really need a particular item? And weighing the benefits of acquiring their new purchase against the disadvantages of parting with their hard-earned money? The folks in expensive business suits call it the ease of spending, emphasizing the smoothness of the experience. Or is that just a euphemism for a slippery slope?

While cards and digital payment apps provide convenience, some cash-backs and discounts to their users, they also share data of our spending habits with businesses which, in turn, use that information for targeted advertising. Digital payment apps and cards make us unmindful of the prices of the stuff we buy and its ultimate utility and value in our lives. That’s why I asked you about the last thing you purchased and its price.

SHOP NOW, PAY LATER

Another major psychological advantage credit cards have over other forms of payment is that they separate the time that we consume goods or services from the time that we pay for them. They reduce my current pain of paying because my mind doesn’t register the tapping of a credit card as handing over money. If I pay 160 rupees in cash for an iced coffee, I pay for it roughly around the same time as I consume it. And I feel the pinch of my over-priced coffee. If I put it on a credit card, I pay for it more than a month later. However, at the time that I’m sipping my coffee, it feels almost free.

And when I do pay for it, I will never truly register the cost of this over-priced iced drink because it will be clubbed along with a car servicing invoice, my monthly Netflix subscription and grocery bills.

FUTURE PERFECT

There’s another thing most of us do. At least the optimists. We usually imagine we will have more money in the future than we do in the present, even if the future is only 45 days away. And so, we happily ring up the expense in the present.

By minimizing the pain of paying, credit cards create an air of detachment that makes us more willing to spend. On the other hand, paying with cash has in-built salience.

THE ROLE OF SALIENCE

Salience is a grown-up term for being aware of something. Cheques are slightly less salient than cash but we still have to write out the sum and hand it over. It registers in our mind as a loss when we hand over a cheque. Credit cards have even lesser salience – just a swipe or tap (please note how nowadays, we don’t even need to hand over the card). We often barely even notice the amount. Digital payments top even this. Point and tap. You barely need a pulse to pay!

So, the next time you think about economising, switch to cash. It may be an enriching experience. In more ways than one!