Why Do We Use Credit Cards? – Analyzing the Psychology of Spending

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Money, fame, and fortune – the three cornerstones some say represent a successful life. Fame is somewhat hard to come by, but money and fortune are all around us. With a simple credit card application, a poor man can feel like a king because he has access to a seemingly unending source of money. Thus he can live a temporary life of luxury because he is spending money he doesn't have to pay back right away. Is that what drives us to stockpile plastic in our wallets, or is there an underlying factor that triggers the craving for credit? The answer lies in the function of the mind.

In this article, we will assess the psychology of spending to determine the real reason why people use credit cards. The answers may surprise you.


The logical reason behind credit card use would be the reward systems associated with modern day cards. Consumers can earn "points" or "prizes" just by spending money, thereby turning shopping into a game, rather than a chore. According to the 2009 Survey of Consumer Payment Choice, 54% of credit cards in use involve some sort of rewards program. That implies a strong desire to earn rewards, but it may not reflect the true reason why we use credit cards as a whole. In fact, an independent study from the Aite Group in 2008 indicated that only 38% of cardholders described themselves as "active participants in rewards programs." 27% of those surveyed were passive participants, meaning that they earn rewards without consciously seeking them out. Thus the thrill of the prize may not be strong enough to power people to apply. There is something deeper lying within.


Another theory behind credit card participation spawns from the classic idea of wanting to conform. Humans have an inherent need to be part of the crowd. Every child wants to sit with the "cool kids" in the cafeteria, and every adult wants to associate with the elitists in his life. The premiere episode of Discovery Channel's Head Games centered around this idea of herd-mentality. In it, Associate Psychology Professor Nathan DeWall from the University of Kentucky and a team of researchers studied different forms of conformity and how people react to it. Their research revealed that people are in fact hard-wired to conform, be it in a gas station, a library, a museum, or anywhere else. This compulsion powered people in the experiments to behave in bizarre ways, just because they wanted to feel "normal." Perhaps that is why people pay with plastic.

In the case of credit card usage, people may be driven by the need to be like everyone else. The 2007 Census showed that nearly 92% of all households in America have some sort of credit card. Thus new applicants may simply want to apply for a card to fit in. On top of that, having extra money allows people to feel wealthier than they actually are, allowing them to associate with groups they may otherwise be excluded from. This, however, may not be enough to fully force consumers to spend money with credit cards.


Yet another theory about credit card spending suggests that the simple availability of credit cards makes people want to use them. Think about going into a fast food restaurant with an assortment of sauces, utensils, and napkins on the counter. You may only need one or two packets of ketchup, but you'll grab a handful because they're there. You might do the same with the napkins, straws, or anything else you can get a hold of, no matter what your logical needs may be. Do credit card users do the same?

This may have been the case prior to the economic decline in 2008. Since that happened though, card companies have tightened their issuing requirements significantly, allowing only those with fresh or excellent credit to receive a new card. Consider the chart below, which highlights the money spent on credit cards compared to the number of cards in use:

Caption: Numbers reflect those found in the 2000 and 2009 Census, with the numbers for 2012 being projections.

As you can see, consumers have drastically increased their spending habits in the past decade, even though the number of cards in use has declined. Availability cannot be a factor because in all actuality, cards are less available now than ever before. There must be something more that is causing people to give into the swiping temptation.


A study in the International Journal of Business and Social Science from April 2012 showed that 69 of 100 people surveyed used their credit cards "only for emergencies." 29 of them said they do this "often" and 40 said they do this "very often." In many cases, families have credit cards on hand because they feel a sense of security with them. Nevertheless, that does not explain why so many others fall into debt from over-spending. Simply having a credit card is not the same as using a credit card. For now, let's divert our focus to those who actively pay with credit cards on a day to day basis.


In the same IJBSS study mentioned above, 70% of the sample group said that a credit card is a "convenient payment" method. 53% of people said the "use of credit card allows me to obtain goods and services within the shortest period." It is faster to swipe a card than it is to count cash or write a check, and speed is an important factor in today's high-paced society. Drive-thru restaurants, email systems, online banking, and the like all encourage consumers to find the fastest payment platforms possible. Perhaps that explains why we use credit cards.


More powerful than any other force is the general apathy buyers feel when paying with credit cards. A study from the Journal of Consumer Research found that "when credit concepts are activated, people attend more to benefit aspects of a product whereas when cash concepts are activated, people attend more to cost aspects of the product being considered." Simply put, people change the way they see a purchase based on the method of payment they use. With a credit card in hand, they look at the positive aspects of the product itself. When using cash, they look closer at the long-term costs of the purchase.

Credit cards allow people to pay back a balance over time, rather than forcing them to physically hand over their hard-earned money. In a radio interview with Morning Edition, Professor Robert Frank from Cornell University asserts that "Cash really when you fork it over across the counter, parting with it is just a more vivid sensation than the abstract act of signing a pledge to pay sometime later in the future." This sensation drives credit card spending more than anything else.


To put matters into perspective, let's look at the money and time it takes to pay off a $5,000 credit card balance making only the minimum monthly payments:

Caption: Numbers based on a $5,000 starting balance with a minimum payment of the interest rate + 1% of the balance – Source: CompareCards Payoff Calculator.

A balance like this would take 24 years to pay off, and it would result in $5,079 in additional interest charges throughout the course of the payments. That's double the initial investment. Consumers do not think about this when they pay with a credit card though. They look at what they can get, not what they will actually have to pay for it over time. Of course, some of the interest can be offset by making payments higher than the minimum payments due, but a study by the Finra Investor Education Foundation showed that 41% of credit card users only pay the minimums every month. It seems that a change in perspective is the reason why people use credit cards instead of cash.

Our Conclusion

Why do we use credit cards? Because they provide us with a venue to look past the cost of an item and simply see it for its benefits. This is the ultimate state of naivety, but it allows consumers to feel better about spending money. In this day and age, ignorance truly is bliss. We all put our fingers in our ears and say "la la la" when the bill collectors come a'calling. Convenience, conformity, rewards, and security may all play a role in credit card use, but it is our general desire to push aside life's negativities that motivates us to pull out the plastic at the checkout counter. Will this knowledge change the way you or I spend money in the future? Probably not. Now we're just a little less naïve about our mental desire to use our credit cards.

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