This paper talks about consumers preference in purchasing products by cash or by credit cards. Credit cards have become important in consumers lives and have changed the way they perceive products. During the past few years various things have occurred which has made the world change drastically. Technology is being developed each day by producing different products which are making people’s lives much easier. So has the idea of purchasing products by credit cards. The 2000s was the moment where credit cards became popular and important to consumers (A Decade of Cards, 2000-2010 and beyond). Credit cards have become an alternative way to pay from the simplest products to the most important ones. The need to put all the payments in one simple card has been a huge benefit for consumers. This was proved when in 2010 cash fell behind debit cards, making debit cards consumer’s favorite way of paying for products for the first time in history (A Decade of Cards, 2000-2010 and beyond). Credit cards have become extremely important to consumers and the differences between paying with cash or with credit cards have been experimented by many people who have given real evidence to these two ways of purchasing products.
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Since 1970’s there have been facts which people have supported that credit cards increase spending (Prelec & Simester, 2000). As a payment mechanism the use of credit cards increases the tendency to spend more on products than cash does (Chatterjee & Rose, 2011). When credit cards are more available consumers think mostly about the products benefits than the cost of the products. Conversely, when cash as a payment is more available consumers place more importance on the cost of the product than on the benefit of it (Chatterjee & Rose, 2011). Many examples have given real evidence to the theory that people who use credit cards spend more. Examples such as restaurants earn more tips when consumers pay with cards, some consumers forget the amount of money they spend on various products, and they tend to buy more in every department store, are facts related to the evidence that people really do spend more when using credit cards (Prelec & Simester, 2000). High calorie foods, mostly junk food are becoming more expensive everyday and this is not just because of the economic way to motivate consumer’s choice but also a psychological motivation that makes consumers choose high calorie foods with pleasure (Bagchi & Block, 2011). So when the cost of a product is higher, such as paying with cash, if we increase the benefits of that product there will be less pain of the payment (Bagchi & Block, 2011).
There is a variation in the countries worldwide who are cardholders particularly differing from those countries that are more developed than the less developed countries (A Decade of Cards, 2000-2010 and beyond). Income is an influence on credit card holding to those countries that are more developed such as the south east and some places in the north west since these places have the biggest credit cards per adult (A Decade of Cards, 2000-2010 and beyond). Credit cards are mostly used in purchasing food where the percentage of spending with cards in this area has grown in the past three years to 36% (A Decade of Cards, 2000-2010 and beyond). In the UK cards have had a huge influence in charity because by using credit cards humanity is growing even more within people (A Decade of Cards, 2000-2010 and beyond). An example of this is some cards that are named with a charity’s name; these companies make donation whenever the consumer uses his/her card or even when they open an account for the first time (A Decade of Cards, 2000-2010 and beyond). Another way of people being voluntarily helpful for charity is online giving where the charitable money are increasing year by year (A Decade of Cards, 2000-2010 and beyond).
Nowadays consumers are using credit cards instead of cash in every purchase they are making. Their preference is mostly on credit and debit cards rather than cash or checks (Consumers prefer plastic to paper payment, 2004). “In 2003 cards were used for 53 percent of purchases, while cash or checks were used for 47 percent” (Consumers prefer plastic to paper payment, 2004). Companies dealing with credit cards are enhancing their usage by marketing new cards that perform like cash and don’t acquire interest charges like credit cards do (Consumers prefer plastic to paper payment, 2004). Furthermore, companies are trying to make different industries offer their consumers the choice of paying with credit cards (Consumers prefer plastic to paper payment, 2004). Prior researches have figured out that when consumers make a decision about a product, credit cards encourage them to spend more than cash does. However, they have not yet discovered whether cash is an influence towards the choices of products (Bagchi & Block, 2011). So the studies provide “evidence that people consume more calories and impute higher costs when purchasing with cash rather than a credit card” (Bagchi & Block, 2011). Nevertheless, when consumers are grocery shopping they tend to purchase more food when using credit cards since the greater the prices of food, the greater the indulgent of the preferred food (Bagchi & Block, 2011). The way consumers experience the payment of products strengthens the different ways they pay- cards or cash (Bagchi & Block, 2011). As a result, consumers think of cash real money and spending cash is more important. The more real the loss of money such as cash payment, the greater is the pain of giving the money for a product. On the contrary, credit cards are more looked as less hurtful and are spent more easily because you don’t see the money; sometimes they may even be treated as play money (Bagchi & Block, 2011). Thus, imputed cost are greater when using cash because the greater the imputed cost of spending, the greater is the chance to choose high calorie food (Bagchi & Block, 2011).
The advantages of using credit cards is the ability of paying for a great period meaning that you can purchase as much as you want and pay later with no interest charge (Cohn, 2010). This lets your money stay in the bank and earn interest as well as making you more flexible with cash flow (Cohn, 2010). Credit cards also have reward programs which consumers are benefiting. For example, a financial planner Frank Remund used his visa signature card to purchase a product. While calculating what he had earned and what he had saved using discount coupons he stated that he paid only $380 for the product which is actually sold for $800 (Cohn, 2010). Moreover, by using his card he managed to increase his warranty period (Cohn, 2010). The other huge advantage of using credit cards is the security that they hold. By carrying big cash with you, there is more possibility for the money to be stolen from you. However, if your credit card is stolen your liability is restricted at $50 and if you have been a loyal customer to the bank, they will credit your account in no longer than a few days (Cohn, 2010). Moreover, if the product you purchased happened to have a problem or you simply aren’t satisfied with its quality, then if you have purchased it with your credit card there is more likelihood for you to return it than there would be if you had bought it by cash (Cohn, 2010).
Nevertheless, except for the many advantages credit cards have there are also some disadvantages when using credit cards. One of the disadvantages of credit cards are high interest charges (Compare Credit Cards). Credit card companies usually charge high interest fees like 20% for the purchases that haven’t been paid in months (Compare Credit Cards). Another huge disadvantage for credit cards is the temptation to overspend. Many people have difficulties in managing their money so when they pay with credit cards they tend to overspend without thinking further. Because credit cards allow you to spend money and not pay them upfront, people get too excited and think just for that moment; so they tend to forget about paying them later on (Compare Credit Cards). Furthermore, it is more difficult to remember what you have purchased when buying with credit cards. So, if you have taken too long to pay for the purchase you might be surprised when the bank informs you for the amount of payment you have to make (Compare Credit Cards).
Three experiments show consumers behavior towards credit cards and cash. “Consumers primed with credit card as a payment mechanism make more recall errors with respect to cost-related aspects of the product than to bene¬t aspects (study 1), identify more words related to bene¬ts (study 2), and respond faster to bene¬t-related words (study 3) than consumers primed with cash concepts” (Chatterjee & Rose, 2011). In the fourth experiment, we look thoroughly through the outcome of the payment prime to the choices of the products (Chatterjee & Rose, 2011). Consumers using credit cards have more possibilities in looking at the products with greater benefits, whereas consumers using cash mostly choose the options that are ruled by cost even if there is less benefit of that particular product (Chatterjee & Rose, 2011). Considering these four experiments, consumers distinguish the same products in different ways when choosing to use credit cards rather than cash (Chatterjee & Rose, 2011). Furthermore, credit cards increase the awareness of the benefits of products in that way persuading the reservation price and product valuation and also making consumers choose the options of products more attractively (Chatterjee & Rose, 2011). For consumers, products have a different meaning when they are bought with credit cards and when they are bought with cash. Thus, “the credit card premium is not due solely to differences in decoupling from pain of payment (i.e., reduced salience of costs) or to physical form, but in addition, the salience of product bene¬ts is enhanced when thinking of paying with credit” (Chatterjee & Rose, 2011). If consumer’s goal is saving money, then the cost of the product becomes more important than the benefit the product carries. However, if the consumer’s goal is to purchase a product with high quality that is beneficial for the consumer, then the cost of the product will be less important thus becoming more psychologically relevant (Chatterjee & Rose, 2011).
In order to prove that people use more calories and impute higher costs when buying with cash relatively to credit cards, a study in a frozen yogurt retail store was experimented (Bagchi & Block, 2011). 125 customers were recruited in a substitute of $1 discount of their next purchase and only the ones who bought a product for themselves were allowed to be a part of the survey (Bagchi & Block, 2011). After customers ordered and purchased their products, the nutritional value of the products purchased by the customers were calculated and used as an evaluation of indulgence (Bagchi & Block, 2011). In this study the customers were asked to tell about the price they paid for the products purchased, whether they thought it was expensive or not, and the method of payment (Bagchi & Block, 2011). The results of the study showed how consumers that paid with cash did not pay more than those that paid with cards. However, consumers though that the imputed cost was much higher when buying with cash than credit card since their products seemed more expensive to them (Bagchi & Block, 2011). This study explained how buying with cash feels more expensive and more hurtful than buying with credit card (Bagchi & Block, 2011). Moreover, the costumers knew the method of payment before they purchased the products so this shows that customers were aware of the method they will use to pay for the products (Bagchi & Block, 2011). Therefore, it is doubtful to state that the choice made for the food purchased had an affect on the method used for paying the product.
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After the study made with the yogurt retail, another study was conducted on a café study for credit versus cash. In this study 147 students were taken and asked to tell their last time they purchased a product for $10 or less; and to choose a product from the restaurant that cost $10 or less (Bagchi & Block, 2011). Further, the students were asked whether it was difficult to decide n their purchase and this was used for the study as a result of imputed cost (Bagchi & Block, 2011). The results showed that consumers who paid with cash chose more calorie food than those who paid with card. Moreover, evidence showed that paying by cash created more indulgence than paying by card (Bagchi & Block, 2011). Both study one and study two showed that “theorizing is predicated on differences in pain of payment, or imputed costs associated with cash versus credit, rather than on the method of payment per se” (Bagchi & Block, 2011).
There are other studies that show the willingness of consumers to purchase more products when using credit cards. In these studies two ways are mentioned in knowing whether the effect is relevant; only when the price of the product is uncertain or when the prices are known (Prelec & Simester, 2000). The first study had to do with prices being uncertain. The experiment had to do with tickets for a sporting event where one ticket was for the game between Boston Celtics and Miami heat, whereas the other ticket was for the Red Sox and the Toronto Blue Jays (Prelec & Simester, 2000). The people experimented were the MBA students. They were asked to enter a room and fill in their own sheet about the reservation values and then they would have the opportunity to win the tickets. Further on, the one that wrote the highest value would get the prize however the prize would be sold at a price identical to the second highest value (Prelec & Simester, 2000). After that, two sheets were handed- cash condition sheet and credit card condition sheet (Prelec & Simester, 2000). In the first sheet, it was required for the winners to make the payment with cash whereas in the second sheet the winners were asked to make the payments by credit cards. In the first sheet they were also asked whether they had access to cash machine and in the second sheet they were asked to tell the type of card they used and some information about the card (Prelec & Simester, 2000). The result of this experiment showed that those who were asked to make the payment by credit card wrote down much higher values for the three tickets and the highest amount of money was for the Celtics tickets, whereas for the banners it was the smallest (Prelec & Simester, 2000). In the second experiment, the prices are certain. “This allows us to evaluate whether the credit card premium arises because customers adjust their valuations from different anchoring points in the cash and credit card conditions” (Prelec & Simester, 2000). For example, in the cash condition consumers might focus more on the amount of money they carry in their pockets. Whereas, in the credit card condition they focus on their credit limit or even their monthly bill (Prelec & Simester, 2000). In the second study students of MBA were respondents and this time they had a chance to win a dinner certificate costing $175 (Prelec & Simester, 2000). The steps for this price were to draw numbers randomly from zero to the price of the certificate and then choose a student randomly. Students were divided into groups depending on who will pay with cash and who with credit card (Prelec & Simester, 2000). In this study the result was that there was no huge difference between credit card and cash conditions (Prelec & Simester, 2000). Moreover, payment had a huge effect but only with those students who completed the credit card digits (Prelec & Simester, 2000). Students who stated that they will pay with credit cards wrote down values 36% more than those who didn’t (Prelec & Simester, 2000). Therefore, “the main effects of payment method and identification method were not significant” (Prelec & Simester, 2000). The information about the market price varied from the first study and the second one. This difference was taken for a reason to see whether credit card premium arose because consumers regulate their estimation of cash and cards in different circumstances (Prelec & Simester, 2000). These two studies offer an idea as to the reason of the effect. They reveal the idea that consumers are more willing to pay with credit cards than they are with cash (Prelec & Simester, 2000).
The studies illustrate how credit cards make peoples decision much easier when purchasing a product. When people purchase with cash they find it difficult to buy expensive products since they can see their cash. However, with credit cards you don’t get to see your cash, you just see a plastic card that sometimes makes you forget how much money you are spending. Moreover, through the studies we understood how consumers perceive products differently when purchasing with cash or with credit card. Those that purchase with cash are more likely to give more importance to the cost of the product than to the benefit and quality of the product. In contrary, those that pay with cards tend to give more importance to the benefits the product gives them than the cost of it (Chatterjee & Rose, 2011). Further on, the willingness to pay grows when consumers pay with credit cards and this was shown in the two studies taken with the game tickets and the prize of certificate (Prelec & Simester, 2000). How much consumers consume food with high calories was also examined with the methods of payment- credit and cash. Studies showed that those who purchase with cash consume more calorie food whereas those who purchase with credit cards consume less calorie food (Bagchi & Block, 2011). “When imputed costs are high, consumers indulge more. These imputed costs vary with the payment mode and also with how difficult it is to earn money. Thus, spending with cash (vs. credit) and spending cash that is more difficult to earn (rather than less difficult) result in more indulgent, high calorie food consumption” (Bagchi & Block, 2011). In the near future, technology will find its way in replacing credit cards by mobile phones since they will be the factor that will replace people’s wallets (A Decade of Cards, 2000-2010 and beyond). So, people will not have to carry their credit cards anymore since their mobile phones will have the ability to make a purchase either through credit or debit (A Decade of Cards, 2000-2010 and beyond).
The research of credit cards versus cash help people understand the advantages and disadvantages each one has. Moreover, they explain how and why consumer’s behavior towards these two methods of purchasing changes when purchasing particular products. Further research should be conducted in order to see which one is better and safer to use. Research such as planning different surveys for consumers to answer their choice of the method of buying would be helpful in understanding consumer’s choice as well as reasons towards their decision. Furthermore, in order to research this further we should gather all the studies conducted and relate them with one another. In this way we will be able to understand more precisely the usage of credit cards versus cash by consumers. One last reason to research this further would be the development of technology. Since technology is changing rapidly, it will change the usage of cardholding. Therefore, research on future technology and how it will have an impact in the market area will be needed to be made. This way we get knowledge as to how things will change and whether it will be a positive or a negative thing for consumers to make purchasing decisions through their mobile phones.
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