About two weeks ago, two separate clients tried to convince me that they needed to keep a particular charge card from their respective bankruptcies. Mind you, it is illegal to intentionally leave a creditor out of your bankruptcy. And even though both of these clients were aware of that, they still felt compelled to plead their case in hopes of keeping this particular debt out of their bankruptcies.
The Appeal of “Free”
The debt, as you’ve probably guessed, was a Victoria’s Secret store charge card. What intrigues me is the reason that both clients wanted to keep their Victoria’s Secret card out of their bankruptcies. Both clients stated, unequivocally, the reason they wanted to keep this card was they get a “free” pair of panties once a month as long as they have a charge card. One of the clients owed $354.00 at the time the bankruptcy was going to be filed and wanted to know if she paid off the balance before the bankruptcy, could she keep the card. I explained that not only could she buy a lot of panties for $354.00, but that Victoria’s Secret would almost surely cancel the card at some point in the near future. Victoria’s Secret probably has less than $1.00 in the cost of the panties they give away, yet the lure of this is so strong that my client was willing to pay $354.00 to continue getting a “free” pair of panties each month. However, while Victoria is clever, this strategy may not be her secret. In fact, the whole idea behind “reward” credit cards is based on this same premise.
Paying with Cash vs Credit
For years, psychologists have studied consumer’s spending behavior with regards to credit cards. In 1986, a landmark study conducted by Richard Feinberg for the Journal of Consumer Research concluded that consumers attitude towards the price they are willing to pay for an item increases substantially if the transaction is going to be made by credit card as opposed to cash. In his research, Feinberg presented various products to the test group. One group was shown the products without any mention of credit cards. The other group was shown the same products, but with credit cards advertised with them and with credit card memorabilia spread throughout the room. The chart below is a summary of his findings from 1986:
|Product||Credit Card absent||Credit Card present||% Increase|
|Toaster||$ 21.50||$ 67.33||213%|
|Black-and-white TV||$ 67.00||$ 136.92||104%|
|Lamp||$ 34.42||$ 47.17||37%|
|Digital clock||$ 18.08||$ 31.25||73%|
|Pocket camera||$ 29.58||$ 52.67||78%|
|Home stereo system||$ 157.42||$ 191.17||21%|
|Dress||$ 25.42||$ 49.42||94%|
|Mixer||$ 17.75||$ 36.25||104%|
|Tent||$ 7.58||$ 28.42||275%|
|Saw||$ 33.42||$ 67.33||101%|
|Chess set||$ 8.67||$ 25.75||197%|
|Cassette tape recorder||$ 26.50||$ 42.75||61%|
The results are astounding. Consumers were not just willing to pay slightly more if they used credit cards; they were willing to pay an increase anywhere from 20% to nearly 300% simply because they would be paying with credit. And believe me, if phycologists understand this, so do the banks and credit cards companies.
If a credit card is willing to give you something “free” more than likely they are making a huge profit from the use of the credit card by the consumer. The evidence clearly shows credit card companies realize consumers are willing to spend more when they are buying on credit. Realize someone is paying for these “rewards”. In the example above, my client was willing to pay $354 for “free” pair of panties each month. If you find yourself spending more than is necessary just to get a reward, you may actually be paying more than that reward is worth.
Cynthia T. Lawson is the Managing Partner of the Bond & Botes Law Offices location in Knoxville, Tennessee. She holds a Bachelor of Science from East Tennessee State University, and a Juris Doctorate from University of Memphis, Cecil C. Humphreys School of Law. She currently serves as a Mentor for the Moment in bankruptcy.Read her full bio here.