Seize the Debt

USC Marshall research shows that you are more likely to borrow if you think you’ll miss out on an experience

August 25, 2017

Would you rather go into debt for a stylish black leather sofa that will be perfect for watching movies and entertaining or a trip to Hawaii with beaches, waterfalls, hiking and snorkeling?

Previous research has suggested that people are more willing to incur debt for a big discretionary purchase that will last a long time, like furniture, but not for a fleeting experience, like a trip.

New research from the USC Marshall School of Business turns that accepted wisdom on its head.

Stephanie M. Tully, assistant professor of marketing at Marshall, and Eesha Sharma, associate professor of business administration at the Tuck School of Business at Dartmouth, published their findings in an article titled “Context Dependent Drivers of Discretionary Debt Decisions: Explaining Willingness to Borrow for Experiential Purchases” in the Journal of Consumer Research.

“When consumers have no source of funding other than debt,” the researchers wrote, “they are more willing to finance experiential versus material purchases.”

Their research is among the first to examine consumer spending decisions for material versus experiential purchases and identify a new driver of borrowing decisions.

The average American household spends $12,800 annually on discretionary purchases and has $7,200 in credit card debt. In their analysis of archival data, Tully and Sharma found that consumers who buy more experiential purchases have higher credit card balances and pay more financing fees.

Timing Is Everything

Imagine you plan on going on a snorkeling trip with friends this weekend. But you don’t have the cash. You can put the trip on your credit card, or you can decide to wait, save the money, and go next month.

But you really wanted to go this weekend. And the same trip next month will be a different experience. So you slap down that plastic.

In contrast, if you were thinking about buying snorkeling equipment this weekend, but don’t have the cash, the thought of waiting until you do isn’t as compelling a reason to reach for your credit card. The equipment is a material purchase. It will be there next week or next month, and you can buy it any time.

“Instead of thinking about how long you’ll have the item, willingness to borrow is more commonly driven by a sense of ‘purchase-timing importance’ — the feeling that the timing of making the purchase is important,” Tully said. “We find that purchase timing is often more important for experiences. That is, because you plan to do something at a specific time, it seems harder to put off making the purchase until you get more money.”

The researchers concluded that offering more financing options for experiential purchases may benefit firms as well as customers. Understanding the importance of purchase timing in discretionary debt is key.

“Firms may encourage consumers to use financing offers instead of delaying a purchase,” they wrote. “For example, focusing consumers’ attention on a particular opportunity for consumption should enhance purchase-timing importance and hence willingness to borrow.”