Unchained in America

“Would you like to save ten percent today?”

You’ve probably been asked that question countless times while you were checking out at a chain store or big box store. If you follow the company’s script, you ask, “How?” Then the sales associate explains that by applying for a store credit card — oftentimes called a rewards card — you’ll save ten or twenty percent on your initial purchase. Then, each time you spend a certain amount of money at any of the chain’s stores — say, $200 — you’ll receive gift certificate for $10.00 or some other amount. You’ll also receive information about special offers and sales for card holders.

The sales associate will go on to say that by filling out a form, you can get instant approval. Then you’ll get the initial discount if you put your transaction on your new store credit card. If you don’t get approved on the spot, usually you’ll still get your discount.

Pressure on Sales Associates to Get Store Credit Cards

Like some of us, you’ve probably been asked the question so often that you want to snap back at the sales associate. But don’t be too hard on him or her. Every month, the executives at corporate headquarters put pressure on store managers by setting quotas for the number of credit cards each store must get that month. The store managers, in turn, put pressure on their sales associates to get at least that number rewards cards.

Oftentimes, sales associates are given individual quotas to meet. The quota depends on how many hours the associate spends working the cash register each week. Many times the sales associates don’t even know what their monthy quotas are.

Both corporate executives and local managers use a carrot-and-stick approach to motivate sales associates to meet their quotas. Motivational techniques might include:

• Giving rewards to stores that meet or exceed their monthly quotas for credit cards.
• Requiring the store manager to phone the district manager to inform him or her that the store didn’t meet its quota for rewards cards. (Some chains even have daily or weekly quotas for their stores. The managers of those stores have to phone their district managers at the end of every day or week — after the stores close in the evening — to inform them of their failure to meet the quotas.)
• Giving rewards to sales associates who meet or exceed their monthly quotas.
• Putting up a list in public view in the break room that names each sales associate, his or her quota for the previous month, and the number of rewards cards each associate actually got. A personal note at the bottom of the list might congratulate the associates who met or exceeded their quotas and tell the ones who didn’t to “get with the program.”
• A manager’s reminding an associate to ask for store credit cards at the start of the associate’s shift.
• A manager’s asking a sales associate at the end of the shift how many rewards cards he or she got.
• An “under performing” associate being called into the manager’s office to discuss why he or she isn’t getting enough store credit cards.
• A manager’s threatening to “write up” the head cashier if she didn’t get at least one rewards card a day.

Why all the pressure by corporate executives to get store credit cards? Because those credit cards bring in big money for the chain.

Overspending with Credit Cards

Studies have shown that you spend more money when you pay for something with a store credit card (or any othe kind of credit card) than if you pay for it with cash — 12-18% more money. And the corporate executives want you to overspend at their chain stores.

How do you overspend by using a store credit card? The answer is simple, but not necessarily obvioius. If you pay for something with cash, you get to weigh the relative merits of the item vs. the price — that is, you can compare the pleasure of getting the item vs. the pain of paying for it. But if you pay for the item with a credit card, you get immediate pleasure — and put off the pain until later.

In an article in Psychology Today, author Michael Kaplan calls putting off the pain till later “hyperbolic discounting.”

[t]he brain decides whether a price is fair by balancing the anticipated pleasure against the pain of financial loss; both of these are emotions of the moment. But if the pleasure is immediate and the pain is in the future, how can we compare them? This is the secret horror of credit: by punting payment off into the middle distance, it brings hyperbolic discounting into play whenever we feel the urge to acquire.

Psychologists have conducted studies in hyperbolic discounting. Medical News Today talks about several studies by Dr. Priya Raghubir and Dr. Joydeep Srivastava. In one study, participants were more willing to pay more for a meal with a credit card than with cash. In another study, participants were more careful with their expenses when they had to create an item-by-item budget for a Thanksgiving dinner. By creating the detailed budget, they could visualize the pain of the dinner’s cost.

I also remember reading about a study a couple of years ago reported in The Boston Globe. In this study, two groups of people were sent to a restaurant with a budget of how much they could spend on their meals. The group paying with a credit card went over their budget. The group paying with cash kept to their budget. (Unfortunately, I can’t find a reference to the study.)

What all these studies and scientific lingo boil down to is that how you pay for something determines how much you’re willing to spend for the item or service. You can pay in one of three ways — cash, debit card or check, or charge card. And each way of paying has its own level of pain:

1. When you pay for something with cash, you feel intsense pain because you can actually see the dollars and coins leave your wallet, purse, or budget envelopes. If you have to take extra money from the ATM, you have the money in hand and know you just depleted your checking account by a certain amount. In short, by paying with cash, you can budget your money and keep track of your spending.
2. When you pay for something with a debit card or check, you feel moderate pain, which isn’t as intense as when you pay with cash. You can jot down the expense in your check book or keep track of it in Quicken, but you don’t actually see the bills and coins leave your wallet or purse.
3. When you pay for something using a credit card, you feel no pain at all because nothing leaves your wallet, purse, budget envelopes, or bank account. Many people don’t even keep track of their charge expenses — and get a horrid jolt each month when they receive their charge bill.

How a Store Credit Card “Chains” You to the Store

The whole point of persuading you to get a store credit card is to make you loyal to that chain’s stores. First, you’re enticed with an initial 10% discount from your initial purchase. Personally, I don’t think 10% is a lot of money. But I’ve seen people sign up for a store credit card just to save 10% on a purchase of under $8.00. Eighty cents (80¢) is a high price to pay for potential credit problems down the line, which I’ll discuss later.

Second, by offering you a deal such as a $10 coupon for every $200 you spend, the’ll keep you coming back to the store to buy stuff so you can get another $10 coupon. That’s fine if you normally buy things at the store anyway, and only buy things that you need. But many people don’t spend that wisely — not even during this recession. So many people end up spending $200 to get back a measley $10. That’s just 5% of what you spent out — not even the amount of the sales tax in some states. Spending $200 to save $10 isn’t much of a bargain.

Third, by alerting you to offers and special sales, they’ll keep you coming back to the store to buy more stuff and pay for it with your rewards card. Again, if you buy something you actually need, that’s fine. But many people don’t make buying decisions that way.

Fourth, store charge cards — and all charge cards — encourage impulsive buying because you don’t feel the pain of the price. That’s why you’ll find candy and other “impulse” items at the checkout line. I even know of a store that put a cooler at their checkout line to entice customers to buy water and soda while waiting for a cashier.

In my next post in this series, I’ll talk about how applying for — and using — a store credit card can hurt your credit score and also create financial problems for you.

See also:

• How a Store Credit Card Can Hurt You
• The Credit Union Credit Card — a Better Alternative

Tags: rewards card, rewards cards, store credit card, store credit cards

This entry was posted on Tuesday, October 20th, 2009 at 11:50 am and is filed under Problems with Chains. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.