Credit cards have become part of our way of life, a convenience we take as much for granted as we do the instant communication of cell phones and the easy, worldwide access to knowledge provided by the internet. But do credit cards have a dark side?
Pretty much anyone, who carries a credit card, knows that it’s easy to get carried away and charge more than planned. So the question is, do credit cards indeed make us spend more?
According to a study by Dunn and Bradstreet, the answer might be yes. In the study, people making a purchase with a credit card on average spent 12-18% more. NPR reports that when McDonalds started accepting credit cards, the average transaction increased from $4.50 to $7.00. When credit cards were introduced for vending machines, the average transaction nearly doubled.
So if credit cards indeed do make us spend more, what might be the reasons? There are numerous, but primary among them is that with credit cards, it’s just a lot easier to spend money. You don’t have to think about how much money is in the account and whether or not there will be enough funds to cover the purchase. Further, there is no need to keep track of charges, so most people have little idea how much they’ve run up on their credit cards by the end of the month.
In addition, when you pay in cash, there’s an emotional connection with the money you part with. Some experts refer to this as the “pain of paying.” Think about paying for a meal at a restaurant-which will hurt more, paying with cash or credit card? And, when would you be likely to order less-if you planned to pay by cash or pay by credit card?
It is these subtle psychological factors that impact our use of plastic. There is an immediate consequence of letting go of the cash: You have to make the connection with just how much money you have and ask yourself whether making this purchase will leave enough cash for everything else.
With credit cards, we buy now and pay later. Because the timing is different, there is no pain of paying-until of course, we get the credit card bill in the mail. But even then the payment can be deferred; we can choose to pay just the minimum and avoid the pain of paying that way.
Another reason credit cards tend to enable spending is that we tend to think about money in terms of percentages, not in terms of absolute numbers, according to Dan Ariely, author of the book Predictably Irrational-The Hidden Forces That Shape Our Decisions. So, if you carry a large balance on your credit card, say $2,800, adding another $100 doesn’t seem like that much in the overall picture. Compare that to having $100 in cash in your pocket-now, spending that $100 suddenly feels very different.
Lastly, most people have no idea just how expensive it is to carry credit card debt and pay only the minimum every month. When you add up the cost of paying just the minimum on your credit card, that $100 charge can easily more than double before it is paid off.
So, what can you do to protect yourself short of simply cutting up your credit cards? Follow these three steps to become less trigger happy when it comes to credit card use:
1. Set a spending limit. Determine how much you can spend and still pay off the card balance in full at the end of the month.
2. Keep track. Use your credit card as you would a debit card or check book. Keep track of charges, and each time you make a charge, deduct the amount from the spending limit you set in Step 1. In this way, you’ll always know how much money is left to spend for that month.
3. Curtail impulse purchases. Yes, it’s a great deal, but can you afford it? Before making an impulse purchase, ask yourself these three questions: Do you really need it? If you make the purchase, will you have enough money left for other needed expenses? Can you make the purchase and still pay your credit card balance in full at the end of the month? If in doubt, defer the purchase. You can always go back and buy the item later.
For more tips, see this article on how to curb credit card spending.
