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The Impact of Credit Cards on Spending: A Field Experiment

In this paper, we report results from the first field experiment to examine the impact of credit cards on spending, a question of great interest for economics, law and public policy. At a regulatory level, if credit cards cause people to spend more and save less, and if there is a long-term desire to increase personal saving, this might provide a rationale for regulation of, or even banning of, credit cards. In the 1980s, the U.S. personal savings rate, which had hovered in the 6-12% range for decades, began a secular decline, culminating by the middle of the first decade of the millennium at a rate close to zero.

This decline of savings roughly coincided with a secular increase in the dissemination and use of credit cards, raising at least the possibility that the proliferation of credit cards contributed to the downward trend. While it is true that the total level of credit card debt is too small to account for much of the decrease in the savings rate (Parker 1999), it is possible that credit cards could contribute to low savings if accumulated credit card debt is transferred to other forms of debt, such as borrowing against real estate.

Beyond the rationale for regulation based on macroeconomic goals, there might also be a rationale for the regulation of credit cards based on individual welfare. If credit cards lead to supra optimal spending, and ultimately to personal financial hardship, their regulation could be potentially justified on much the same basis as certain types of drugs are outlawed because they are viewed as too tempting and dangerous. There is, in fact, some evidence of a correlation between debt and financial distress. For example, Brown et al. (2005) observes a negative correlation between the unsecured debt, including credit card debt, and psychological well-being.

The same paper found no comparable relationship between secured i.e., mortgage debt and well-being. But again, one cannot infer causation; it may be that credit card debt is one way that financially strapped households temporarily avoid penury, in which case they might be worse off, and even less happy, without such debt. Indeed, credit cards are probably not be the worst method of obtaining an instant loan; payday loans and pawn shops offer even higher effective interest rates, and, unlike credit cards, have been empirically linked to negative outcomes such as bankruptcy and even crime (Skiba and Tobacman 2008).

Showing that spending with credit cards causes otherwise similar consumers to spend more would be at least a first step to demonstrating that they carry risks of this type. Clearly, it would be useful to have an answer to the question of whether spending with a credit card causes an average individual to spend more. A finding that credit cards promote spending would also contribute to research on mental accounting (Thaler 1985) by showing that spending varies as a function of payment medium.

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The Impact of Credit Cards on Spending: A Field Experiment