How Credit Cards Affect Our Brains
Buying with plastic doesn’t just eliminate a barrier to buying. It actively encourages purchases.
Buying with plastic doesn’t just eliminate a barrier to buying. It actively encourages purchases.
It’s been known for decades that credit cards encourage spending. But why that happens still isn’t entirely clear. New research offers some fresh insight into the causes—and how consumers might be manipulated in an increasingly cashless society.
Research on credit-card spending has tended toward the explanation that delaying payment removes a barrier to purchases in shoppers’ minds. A study published in February in Scientific Reports found evidence of another kind of trigger. Differences it found in brain activity between shoppers planning to use a credit card and those planning to buy with cash indicate that buying on credit doesn’t just ease shoppers’ inhibitions, it actively encourages purchases, the researchers say.
The upshot: When people are shopping with credit cards and see a product they like, the neural network in the brain that produces a sensation of reward perks up, which seems to create a craving to spend, says Sachin Banker, assistant professor at the University of Utah, who worked on the study as a Ph.D. student at the MIT Sloan School of Management.
“You’re basically feeling more reward when you shop with credit cards,” he says. “We don’t see that with cash. It was actually a very stark difference.”
Researchers used a form of magnetic resonance imaging to measure the brain activity of the study subjects as they participated in a shopping exercise. Each participant was shown a total of 84 everyday products over the course of three sessions and was asked whether they would buy each product at the stated price. Half the products were offered for purchase by credit card and half for purchase with cash. None of the products cost more than $50.
The differences in the shoppers’ brain activity support the hypothesis that after repeated credit-card purchases over time the brain learns to anticipate the rewards of credit-card shopping, according to the report. And that suggests that consumers could be conditioned to spend through the use of various sensory rewards in new payment systems, Dr. Banker says. For instance, with digital payments the use of particular sounds or vibrations on your smartphone when you make certain purchases but not others could, over time, teach your brain to anticipate rewards for buying specific products while you’re shopping.
Dr. Banker adds that further research could be done to see if the study’s theories hold true at higher prices. It also could study consumers who tend to overuse or misuse credit cards, to understand further why they act as they do. This study focused on people who mostly paid on time and used credit cards appropriately. Understanding brain patterns for other types of consumers could help lead to solutions that attempt to pre-empt harmful spending behaviour, Dr. Banker says.
Reprinted by permission of The Wall Street Journal, Copyright 2021 Dow Jones & Company. Inc. All Rights Reserved Worldwide. Original date of publication: May 1, 2021
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The bank posted unaudited cash earnings for the quarter of A$1.7 billion, down 2% on the average of its prior two quarters
National Australia Bank said that higher credit impairments against business loans contributed to a small fall in its unaudited December quarter cash earnings.
NAB , which is Australia’s second-largest bank by market capitalization, on Wednesday posted unaudited cash earnings for its fiscal first quarter of 1.74 billion Australian dollars, equivalent to about US$1.11 billion.
That was down 2% on the average of its prior two fiscal quarters. NAB did not give a year-earlier comparison.
The lender said that revenue grew by 3% compared with the average of its prior two fiscal quarters. Underlying profit growth of 4% over the same period was offset by higher credit impairment charges and income tax expenses, it added.
NAB, which posted an unaudited quarterly statutory profit of A$1.70 billion, said the A$267 million credit impairment charge included A$152 million of individually assessed charges. Those were mainly against Australian businesses and unsecured retail portfolios, it said.
The individual charges were up by 54% compared with a year earlier. NAB said that it had not altered its economic assumptions and scenario weightings.
“The economic outlook is improving but cost of living and interest rate challenges persisted,” Chief Executive Andrew Irvine said. “While most customers are proving resilient, we have maintained prudent balance sheet settings.”
NAB said it had seen a small decline in net interest margin due to funding costs, lending competition and deposits, partially offset by the benefit of higher interest rates.
On Tuesday, the Reserve Bank of Australia cut the country’s cash rate for the first time since 2020 but warned against expecting subsequent near-term cuts.
NAB is still targeting full fiscal-year productivity savings of more than A$400 million, and for operating expenses to grow by less than 4.5%, Irvine said.
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