Going for the pain of paying

For Gun-Shy Consumers, Debit Is Replacing Credit:

Visa announced this spring that spending on Visa debit cards in the United States surpassed credit for the first time in the company's history. In 2008, debit payment volume was $206 billion, compared with credit volume of $203 billion. MasterCard reported that for the first six months of this year, the volume of purchases on its debit cards increased 4.1 percent, to $160 billion, in the United States. Spending on credit and charge cards sank 14.8 percent, to $233 billion.

"Consumers are rational thinking individuals, and they're going to shift their behavior in a way that fits with their current economic situation," said Scott Strumello, an associate with the Auriemma Consulting Group, a Long Island-based payment card advisory firm. "They're thinking more seriously about it, and many may decide, 'I'm going to use debit where I can and reserve credit for larger purchases.' "

I think really what's going on here is that people are embracing the pain of paying; when you decouple time of payment from what you're purchasing that tends to result in more purchase than would otherwise be the case. A perfectly rational individual wouldn't need to make a distinction between debit and credit, what does it matter if you pay for a latte tomorrow (that is, it comes out of your account tomorrow) vs. the next billing cycle? No, people are rational about the fact that they are irrational. Pay later = buy more, pay tomorrow = buy less. If you want to buy less then heighten the immediacy of the cost.