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Buy it Now and Pay For it Later: An Experimental Study

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The Psychological Record, 2013, 63, 323–332

Buy It Now and Pay for It Later: An Experimental

Study of Student Credit Card Use
Asle Fagerstrøm
The Norwegian School of Information Technology

Donald A. Hantula
Temple University

Credit card debt is of increasing concern among college students, but reasons
for it are not well understood. In a simulated shopping experiment based on a
hyperbolic discounted utility model, 21 participants could either save money
for a new model of their favorite mobile phone brand and get it in the future or
buy the product on credit and get it now. Students were willing to pay a high
interest charge (nearly 40%) rather than wait to save money and purchase the
phone interest-­free. These results were moderated by student experience with
credit purchases. Those who did not normally use a credit card did not opt
to buy the phone immediately on credit but preferred to delay purchase until
the money was saved. These data demonstrate that in some cases immediate
availability of a much-­desired product such as a mobile phone may induce
credit spending with extremely high interest rates.
Key words: credit card use, college students, hyperbolic discounting,
experimental study
In recent years, there has been a dramatic growth in credit card usage among
university students (Lawrence et  al., 2003; Manning, 1999; Nellie Mae, 2005).
Furthermore, compulsive buying, defined as the inability to control choice, is higher
among college students than the general public (Brougham, Jacobs-­Lawson, Hershey, &
Trujillo, 2011). Students argue they want and often need a credit card because it gives
them advantages such as convenient means of payment, a resource in case of
emergencies, and a means of establishing a good credit history (see Newton, 1998).
Although most students manage their finances well, a significant minority get into
serious debt and are therefore at risk of not being able to repay. When other debt is added
to this, such as educational loans, the concern becomes even greater. For these persons,
collegiate credit use can lead to an adult life and career already heavily burdened by
debt, as well as a low credit rating.
The reasons for student overuse of credit are not well understood (Kamleitner, Hoelzl,
& Kirchler, 2012). It could be assumed that credit card use and students’ compulsive

Research for this article was funded by a grant from the Promotion of Studies in Banking and
Finance (Norway) to the first author.
Correspondence concerning this article should be addressed to Asle Fagerstrøm, The
Norwegian School of Information Technology, Schweigaardsgate 14, 0185 Oslo, Norway. E-­ mail:
asle.fagerstrom@nith.no
DOI:10.11133/j.tpr.2013.63.2.007
324 FagerstRøm and Hantula

buying is associated with having a low disposable income. However, Fogel and Schneider
(2011) showed that higher income is associated with more irresponsible credit use and
accompanying money problems. Academic performance shows no association with the use
of credit cards (Pinto, Parente, & Palmer, 2001). Perhaps overuse of credit cards can be
attributed to a lack of knowledge; Warwick and Mansfield (2000) show that the majority of
students could not report accurately their credit card interest rate. But, Norvilitis and
MacLean (2010) found no direct effects between knowledge and credit card debt, and
Robb and Sharpe (2009) showed that students with good financial knowledge were not
significantly different from students with less financial knowledge in terms of the
probability of having a credit card balance; instead, students with higher levels of financial
knowledge had significantly higher credit balances.
It may seem self-­evident that certain personality variables may be reliable predictors
of credit card use; however, the data are inconsistent. For example, Norvilitis, Szablicki,
and Wilson (2003) found that credit card debt was not related to certain personality
variables nor to dysfunctional impulsivity, similar to the Foxall, Doyle, Yani-­de-­Soriano,
and Wells (2011) study of context and individual differences as influences on consumers’
delay discounting. In contrast, Mansfield, Pinto, and Parente (2003) found that students
who carried a monthly balance on their credit cards scored higher on an impulsiveness
scale than did students who did not carry a balance. A related experiment found that
students who scored low on a concern for future consequences scale and who were faced
with high levels of debt directed money away from options maximizing long-­term interests
toward more short-­term purchase alternatives such as credit cards (Joireman, Sprott, &
Spangenberg, 2005). The previously cited studies were carried out in the United States and
the United Kingdom, but similar inconsistencies are found outside of these countries.
Wang, Lu, and Malhotra (2011) studied a large sample of credit card users in China and
found inconsistent and small effects for individual difference variables on revolving credit
use. Ironically, although credit card use is common in both developed and developing
nations and can often lead to ruinous financial choices, its correlates and predictors are not
well understood.
Credit use is an integral part of modern economies. In a situation with limited
liquidity, the person often has two options for obtaining a product: saving to purchase
the product later or buying the product on credit now. If the person saves money,
sacrificing present consumption for future consumption, he will get the product at some
point in the future when he can afford to pay the cash price. If the product is purchased
on credit, she will get it immediately, sacrificing future consumption for present
consumption, but must pay a higher price (cash price + interest). Economists refer to this
type of consumer decision as an intertemporal choice (see Fisher, 1930). In a situation
like this, the person’s preference for the long term—saving money to buy the product—
tends to conflict with his short-­term desires—buying on credit and getting the product
immediately.
Intertemporal choices can be viewed from the perspective of standard discounted
utility (Samuelson, 1963), which indicates that rewards and costs that occur at different
times can be compared by discounting future utility. For example, a person with a yearly
discount factor of 80% would be indifferent given a choice between an option with a
reward utility of $800 today and an option with a reward utility of $1,000 next year,
because $800 is 80% of $1,000. Thus, the standard discounted utility model refers to the
decrease in the person’s subjective value of a reward or cost as a function of increasing
delay, and this value would be expected to be a consistent, exponential function
(Loewenstein & Prelec, 1992).
Findings from behavioral economic studies suggest that the discount rate for values in
a future period is not an exponential function of delay, as the standard discounted utility
model implies, but is better described as a hyperbolic function, in which the rate of
discounting decreases with the passage of time (Ainslie, 1992, 2001; Chong & Herrnstein,
1967). Experimental evidence (Green & Myerson, 2004) on the effect of delay on
 Credit Card Use 325

intertemporal choices shows that delayed outcomes are devaluated in a hyperbolic manner,
which can be described by the following hyperbolic equation (Mazur, 1987):

V = A/(1 + kD), (1)

where V is the subjective value of the delayed outcome, A is the amount of the delayed
outcome, D is the delay, and k is a free parameter that reflects the discounting rate. A
hyperbolic discount function declines at a faster rate in the short run (near to the present)
than in the long run. In contrast, the exponential discount function involves a consistent
proportional decline over any given time period.
The hyperbolic discounted utility model has generated numerous empirical predictions
that distinguish this model from the standard discounted utility model (see Goldin, 2007).
One feature that favors the hyperbolic discounted utility model is its ability to explain why
consumers sometimes behave in ways that are dynamically inconsistent, that is, when a
consumer’s choice at the time of action diverges from a previously expressed preference.
For example, imagine that a new mobile phone appears on the market and a person is
extremely interested in getting the product. Unfortunately, liquidity is at the time is
limited, and the person has to save money to purchase the mobile phone. The person has,
however, a second option, which is to buy the product on credit. Initially he is averse to
buying products on credit because of the unfavorable economic consequences. The person’s
final choice depends largely on his estimation of how much time it would take to save the
money for the product. The saving option represents a larger-­later reward in the sense that
the price for the mobile phone will be less than if it is bought on credit. The credit option
represents a smaller-­sooner reward (a temptation). If the larger-­later reward (the saving
option) is not too far in the future, it would not be discounted too much, and its current
value, even when discounted, would be higher than that of the smaller-­sooner reward (the
credit card option). On the other hand, if the larger-­later reward (the saving option) is far in
the future, it would probably be discounted more than the smaller-­sooner reward (the
credit card option), and the person in this situation might change his preference and
purchase the mobile phone on credit.
The hyperbolic discounted utility model has been used to investigate credit card use
in previous studies, with different results. For example, Shui and Ausubel (2004) found
support for the hyperbolic utility model based on a large-­scale experiment in the credit
card market. Conversely, a long-­r unning survey of consumer financial behavior
commissioned by Visa USA did not find support for the hyperbolic discounted utility
model with respect to credit card use (Brown & Plache, 2006). These large-­scale studies
may be able to summarize the behavior of many individuals, but they are correlational and
lack experimental control. As far as we know, the hyperbolic discounting utility model has
not been used to investigate credit use in college students.
Thus, building on the hyperbolic discounted utility model, the present experiment seeks
to expand our understanding of credit card use, specifically among a student population.
Participants in the study were presented with a simulated shopping situation and were asked
whether they would save money for the product and get it later (the larger-­later reward) or
buy the product on credit and get it tomorrow (the smaller-­sooner reward). It was assumed
that participants would discount the value of the credit option hyperbolically as a function of
the saving option being delayed until sometime in the future.

Method

Participants
Twenty-­t wo college students from The Norwegian School of Information Technology
accepted an invitation to participate in an experimental study about consumer choice.
There were 19 males and 3 females, with an age range from 19 to 37 years and an average
326 FagerstRøm and Hantula

age of 23.09 years. The distribution of males and females in the study reflects the
dominance of males at the university—85% males and 15% females. Participants were
informed that the experiment would last up to 20 min, and due to the short duration, they
were not offered any payment for participating.

Apparatus
A simulated shopping microworld (DiFonzo, Hantula, & Bordia, 1998) was
programmed in MediaLab (version 2010), which presented the tasks and recorded data.
The experiment was conducted in a PC lab with 16 computers with Intel Xeon X3430
2.4-GHz processors and 19-in monitors with a resolution of 1440 × 900 pixels. The
monitors were arranged so that no participant could see the stimuli on the other
participants’ monitors. A standard mouse was used to indicate choices.

Procedure
Upon arrival in the PC lab, participants were led to one of the computers and informed
about their general rights as participants in the experiment. The experimenter then
explained that all necessary information for the task would be presented via the monitor.
Participants then completed the experiment alone. When the experiment was over, the
participants were asked if they had any questions and were told that they could contact the
experimenter if they thought of any questions about the experiment later.
The task for the participants was to choose how to purchase a new mobile phone. The
participants were presented with a scenario in which they were to assume that a new model
of their favorite mobile brand was launched on the market. The cash price for the product
was NOK 5298 (approximately $878.13), which was the price of a popular mobile phone
(Samsung GALAXY S II) on the market at the time the experiment was conducted. To
avoid brand preference effects, no brand name was mentioned. Participants were told to
assume that at the moment they did not have the money to buy the mobile phone. Based on
this assumption, participants chose whether they would save money for the product and get
it later or buy it on credit and get it tomorrow.
The two alternatives were presented in a pair on the monitor to all subjects (see
Figure 1). Participants chose by clicking with a mouse on the preferred alternative. The
saving alternative stated how many weeks it would take to save NOK 5298 (1 week,
3 weeks, 5 weeks, 7 weeks, 14 weeks, and 21 weeks). The credit alternative stated the
amount of money the person had to pay if he or she chose to buy the product on credit and
get it tomorrow. Maximum total credit price of the phone was NOK 7416 (cash price NOK
5298 + credit interest NOK 2118). The credit alternative was arranged as a psychophysical
up–down titration procedure after Raineri and Rachlin (1993) in the following proportions:

The next alternative is:

• Save in five weeks and pay cash, price kr. 5,298.00

• Buy now on credit and get it tomorrow. You pay kr. 233.99 each 
month. In 24 months, total price kr. 5,615.70

Which alternative do you choose?

Save Buy on credit

Figure 1. Example of stimulus presented to participants.

 Credit Card Use 327

1.0, 0.99, 0.98, 0.96, 0.94, 0.92, 0.90, 0.85, 0.80, 0.75, 0.70, 0.65, 0.60, 0.55, 0.50, 0.45,
0.40, 0.35, 0.30, 0.25, 0.20, 0.15, 0.10, 0.08, 0.06, 0.04, 0.02, 0.01, 0.005, 0.001, 0.0005,
0.0001. These proportions were presented as values in NOK (e.g., get the product tomorrow
and pay NOK 256.88 each month for 24 months [cash price NOK 5298 + credit interest
NOK 1059; 0.5 of NOK 2118], total credit price NOK 6357). After two changes in
preference, representing a switch either from the saving alternative to the credit alternative
or from the credit alternative to the saving alternative, the saving plan (non-­t itrated
stimulus) was changed, and the participant began again. Smith and Hantula (2008) noted
that this binary choice procedure has been used since the 1970s in studies with both human
and non-­human animals and recommended it as a “best practice” in discounting research.

Post-­Experimental Interviews
When the experiment was finished, the participants were asked two questions: Have
you previously bought something on credit (yes or no)? and What do you think has
influenced the choices you made?

Results
All participants completed the experiment sessions. However, one participant reported
that he made mistakes on Sessions 4 and 5 (7 and 14 weeks of saving, respectively) and was
therefore excluded from the analysis. Results showed that 18 out of 21 participants were
willing to buy the mobile phone on credit, and willingness to buy on credit increased when
saving time increased. Median switch point was calculated based on 21 participants’ data in
accordance with Raineri and Rachlin (1993). The median switch point is the value at which
the participants were indifferent to buying the phone on credit and receiving it immediately
or waiting to save money to buy it later. Because the data show an accretion function (as
opposed to the more common decay function), in order to fit the data to Eq. (1) and calculate
k and area under the curve (AUC; Myerson, Green, & Warusawitharana, 2001), the data were
converted in accordance with Hantula and Bryant (2005) to the following:

1 − (median purchase price/maximum price) (2)

Figure 2 shows that there is a fairly gradual degree of discounting overall. Delays of 1,
3, 5, and 7 weeks decline linearly, while delays of 14 and 21 weeks have approximately the
same value. Overall, the degree of discounting is not particularly steep (k = .12;
AUC = .24). Answers to the debriefing question about previous credit behavior showed
that eight participants had bought something on credit before and 13 had not. If the data
are displayed and analyzed in terms of students who have a history of using credit to
purchase goods and those who do not have a history of using credit to purchase goods (see
Figure 3), a different picture emerges. Individuals with a history of using credit to purchase
items show a steep discounting curve, whereas those who do not have experience using
credit for purchase show a nearly flat function with virtually no discounting.
Answers to the debriefing question “What do you think has influenced the choices you
made?” were also helpful when analyzing the cases. Answers were on the whole split
between those who had bought something on credit before and those who had not.
Participants who had bought something on credit before mentioned total price and saving
time as the most important factors that had influenced their choices. For example,
Participant 15 answered that “the period of having to wait and the total price” were the
most important factors. In addition, Participant 22 answered, “Since it took longer to save
up, I was willing to pay more on credit.” Participants who had not bought on credit before
had well-­established rules for not buying on credit. For example, Participant 13 stated, “I
never buy anything before I can pay cash,” and Participant 16 answered, “As long as I have
a mobile phone that works, I’m able to save and wait. NOK 200–300 per month is rather a
 Save Buy on credit
328 FagerstRøm and Hantula

kr. 7,400
kr. 7,200
kr. 7,000
kr. 7,400
kr. 6,800
Purchase Price

kr. 7,200
kr. 6,600
kr. 7,000
kr. 6,400
kr. 6,800
kr. 6,200
MedianPrice

kr. 6,600
kr. 6,000
Median Purchase

kr. 6,400
kr. 5,800
kr. 6,200
kr. 5,600
kr. 6,000
kr. 5,400
kr. 5,800
kr. 5,200
kr. 5,600
kr. 5,400 1 3 5 7 14 21
Weeks of Saving
kr. 5,200
Figure 2. Point of indifference of median purchase credit price as a function of
weeks of saving
1 before
3 5buying7 the mobile phone. 14 21
kr. 7,400 Weeks of Saving Have bought on credit before
kr. 7,200
Have not bought on credit before
kr. 7,000
kr. 7,400
kr. 6,800 Have bought on credit before
Purchase Price

kr. 7,200
kr. 6,600 Have not bought on credit before
kr. 7,000
kr. 6,400
kr. 6,800
kr. 6,200
MedianPrice

kr. 6,600
kr. 6,000
Median Purchase

kr. 6,400
kr. 5,800
kr. 6,200
kr. 5,600
kr. 6,000
kr. 5,400
kr. 5,800
kr. 5,200
kr. 5,600
kr. 5,400 1 3 5 7 14 21
Weeks of Saving
kr. 5,200

1 3 5 7 14 21
Weeks of Saving
Figure 3. The credit experienced versus the credit inexperienced on point of
indifference of median purchase credit price as a function of weeks of saving
before buying the mobile phone.

lot of money which could have been spent on food etc.” Finally, Participant 17 answered,
“It is better to save than to buy on credit, which basically is money you don’t have.”

Discussion
We examined whether participants would discount the value of the credit option as a
result of the money saving option being delayed until sometime in the future. Our results
demonstrate that the immediate gratification of purchasing a new mobile phone on credit is
very powerful, with participants willing to pay upwards of a 75% premium of credit plus the
interest price of the phone, even if the wait to save the money and buy it interest-­free was
 Credit Card Use 329

only 1 week. With such little discounting evidenced, it is as if the interest penalty of nearly
40% over the purchase price had a minimal effect on behavior. The decline in value from 14
to 21 weeks of savings may be due to the fact that the generally perceived useful life cycle of
a mobile phone is at most 52 weeks (1 year), but the credit payments could last 24 months.
This is essentially negative credit on an outdated item, or as Participant 11 stated, “Mobile
phones are upgraded all the time, and it would be stupid to tie up for 2 years.”
The foundation of standard economic theory has typically been that consumers are
rational utility maximizers; that is, subject to liquidity constraints and the market price,
consumers make choices that in the long run maximize their utility. However, as Herrnstein
(1990) observed, people do not always make choices in accordance with the rational
economic model. Credit card use is one such case where people apparently do not behave in
accordance with the precepts of rational choice. In a situation with limited liquidity, people
sometimes succumb to the temptation of credit card offers with the consequence of paying a
disproportionately high interest rate and probably less long-­term economic liquidity.
A model of consumption based on a hyperbolic discount function is useful in
understanding credit card use because it provides a parsimonious representation of self-­
control problems. Perhaps a reasonable response to this dilemma of self-­control and credit
use would be to advocate for more education regarding credit card use in student
populations. Such a stance is an implicit endorsement of a rational choice perspective;
given enough information, people will choose rationally. However, Norvilitis and MacLean
(2010) found that financial knowledge and parental instruction did not have a direct effect
on student credit card use, and Robb and Sharpe (2009) found that increased financial
knowledge was associated with increased credit card use. Problems with credit card use do
not seem to stem from lack of knowledge. Furthermore, although it may be commonly
assumed that difficulty with mathematical concepts and calculations may lead to sub-­
optimal credit use, it should be noted that the present study was conducted with students in
engineering and information technology, fields noted for their quantitative rigor.
Some studies show that there may be some relationship between impetuosity and lack
of a concern for future consequences and problematic credit card use (Joireman et al.,
2005; Mansfield et al., 2003). Despite the fact that there may be some superficial validity
for this idea, it may not be wise to rush to such a conclusion. Impetuosity (or impulsiveness)
is not a well-­defined construct, and purported measures of impulsiveness do not correlate
with one another, nor do they correlate with measures of delay discounting (Smith &
Hantula, 2008). Further, Foxall et al. (2011) showed that delay discounting is domain-­
specific in the consumer context when choosing between immediate and delayed health
and between money and vacation, and Kerwin, Woodside, and Hantula (2012) showed that
consumer delay discounting is specific to choices of goods for one’s self or one’s child. The
evidence clearly suggests that delay discounting is not a trait. Also, in such a trait-­based
analysis, delay discounting may be considered to be simply the opposite of self-­control,
which is then also interpreted as a trait. However, self-­control is not a trait; it is behavior.
Self-­control may be better understood by looking at an individual’s credit use as rule-­
governed behavior. Skinner (1969) defined rule-­governed behavior as behavior controlled
by the description of relations between responses and verbal stimuli, rather than actual
exposure to these contingencies (contingency-­shaped behavior). Credit card use that is
controlled by the verbal stimuli “Buy this mobile phone on credit and get it tomorrow”
should, therefore, be defined as rule-­governed behavior. Zettle and Hayes (1982) identified
three main functional units of a person’s rule-­governed behavior: pliance, tracking, and
augmenting. According to Fagerstrøm, Foxall, and Arntzen (2010), augmentals have an
important function related to a person’s motivation and may therefore also provide a more
comprehensive understanding of credit card use. The explanations the participants in this
study gave for their behavior support a rule-­governed behavior account of credit card use.
Consumer credit use is an important social issue that is in need of much more
exploration. Future research in this area should include populations beyond college
students. Given the results of the present study showing a large difference between those
330 FagerstRøm and Hantula

individuals who are experienced in using credit versus those who are not, it may be
worthwhile to explore how this difference plays out over an individual’s lifespan.
Additional explorations of how discounting functions may change as a function of the
nature and cost of the goods purchased, prevailing interest rates, and anticipated future
interest rates may be very informative. The rule-­governed nature of credit use found in the
current study is nearly identical to the rule-­governance effects in another online shopping
study by Smith and Hantula (2003), who found that the one participant who did not show
the expected price discounting function between stores revealed in a post-­experimental
interview a well-­taught rule by her entrepreneurial parents to “spread the wealth around”
and spend an equivalent amount of money in each store.
Taken in the context of the current literature base, these results have some important
implications for practical applications. The first is that didactic education intended to instill
more responsible credit use is likely to fail (Norvilitis & MacLean, 2010; Robb & Sharpe,
2009). Similarly, a search for certain “personality types” likely to abuse credit will fall
short. Instead, responsible credit use training focusing on generating rules for appropriate
credit use, pre-­commitment behaviors to voluntarily restrict access to credit when
temptation (motivating operations) to abuse credit abounds, and possible social
reinforcement programs for appropriate credit use may be more successful.
This study is not without limitations. Analysis of the results should be tempered by
the realization that participants were responding to a simulated shopping situation. On the
other hand, reviews of studies on differences in the discount rate between real rewards and
hypothetical rewards conclude that methods involving hypothetical choices and those
involving real consequences usually show qualitatively similar results (Camerer &
Hogarth, 1999; Green & Myerson, 2004). In addition, the titration procedure may have
been too difficult for some of the participants. One participant made errors when
completing the titration procedure, and a few reported afterwards that they were not
familiar with the titration procedure. This may have influenced the results of the early
sessions (1, 3, and 5 weeks’ savings) in the experiment. One solution for future experiments
would be to conduct training sessions ahead of the main experiment, while another is
adapting a less confusing version of a delay discounting task, as recommended by Smith
and Hantula (2008).
A credit card can be a useful personal financial tool or a turn toward the road to ruin.
As students’ credit use increases in the developed and developing worlds, it is important to
understand credit so that policies and interventions may be designed that will allow
consumers access to needed credit while at the same time protecting them from financial
disaster. Simple calls to adhere to rational choice dictates and assumptions of personality
peccadilloes such as “impulsiveness” that do little more than blame the victim are likely to
be ineffective, as will appealing but inept attempts at financial education. The central issue
here is not one of rationality or ignorance, but rather one of motivation, an issue that
advances in current economic and verbal behavior research are well situated to address.

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