Editorial Policy

Q&A on Spending and Debt with Amar Cheema

Marcia Frellick

November 9, 2011

What stands in consumers’ way of achieving happiness?

Th_qa-amar-cheemaA book released this year, “Transformative Consumer Research for Personal and Collective Well-Being,” looks at ways consumers can tap into their potential to make better decisions and boost both wisdom and happiness.

Chapters by international researchers take a look at what’s empowering consumers — the Internet, pro-environmental consumption, leisure pursuits, etc. — as well as barriers to happiness, such as credit card mismanagement; childhood obesity; alcohol, tobacco, pornography and gambling abuse; and ecological deterioration.

The book, edited by University of Virginia McIntire School of Commerce Professor David Mick, along with Simone Pettigrew, Cornelia Pechmann and Julie Ozanne, focuses on behaviors connected with marketing, buying and consuming.

Amar Cheema, associate professor of commerce at the McIntire School, is co-author of the chapter on credit card mismanagement. He talks here with CreditCardGuide.com correspondent Marcia Frellick about his research on consumer spending and his personal experience with credit card debt. Answers are edited for brevity and clarity.

CreditCardGuide.com: How should a consumer think of credit card spending to avoid misuse?

Amar Cheema: When you think of using a credit card as taking out a loan, you are more prudent about it or you are less likely to spend. If you are not able to pay it off in 20 days or three weeks, then you are essentially taking out a really high-interest loan. [The other thing you should ask yourself is,] “Could I justify this to my wife [or someone else]?” It’s actually surprising; it stops you from buying a lot of things. So the underlying principle there is if you consciously think about having to justify the expense to someone else, then that might lead you to make better decisions than otherwise. If you think it’s your money, you’ll feel richer and you’ll say, “Hey, I have it, so I can spend it.”

CreditCardGuide.com: Why was credit card overspending chosen for a chapter in this book?

Cheema: One of the reasons was because previously my co-author Dilip Soman and I studied this in the context of people who were not very well-versed with using credit cards. What we found was populations of lower-income consumers who have fewer credit cards or college students who haven’t had a long history of experience with credit cards seemed more susceptible to overspend and basically run up credit card debt. I think for that population such a chapter would be useful. Recently [the Credit CARD Act of 2009] was passed, which prevented credit card companies from [using incentives] on campuses to get students to sign up for credit cards. So, that would be another indicator that, look, this is a problem that is in the sights of policymakers.

CreditCardGuide.com: You came here to study from India, correct?

Cheema: Yes, in 1998.

CreditCardGuide.com: What inspired your original interest in studying credit cards?

Cheema: For me, credit cards were a loan of last resort, because not having a credit history, or a well-developed credit history, I would not be able take out a loan from a bank. And so I went in knowing that I was taking out a 21 percent loan and this was one of the resources that was available to me to do that. In graduate school, my interest in studying credit cards also stemmed from being one of those consumers who did have credit card debt.

CreditCardGuide.com: How does the physical act of paying with credit cards encourage overspending more than writing a check or paying with cash?

Cheema: Paying with cash is usually perceived to be the most painful, followed by writing a check, then using a debit card and then using a credit card … In writing a check or paying with cash, it forces you to be cognizant of the exact amount. That is something that doesn’t always happen when you’re swiping a card. Because, let’s say you walk away from a transaction, usually when researchers ask people how much did you just spend, those who have paid with cash or check can give a better answer. Paying attention to [the amount] forces you to make the calculus in cash of, hey, do I have that amount in my wallet? Or when writing out a check, do I have that amount in my bank? So, forcing people to pay attention to the price is painful and decreases people’s likelihood of buying something. That’s one reason why when you swipe a credit card and say it’s something I have to deal with three or four weeks later, it makes it more likely you will buy than one of the other mechanisms.

CreditCardGuide.com: What about paying with mobile phones? Will this make consumers think even less about what they’re spending?

Cheema: The convenience argument is appealing to consumers, but there is a risk. Starbucks has a mobile app, where when you walk in and there’s a bar code that shows up on your cell phone and you can hold it next to the scanner on the register and pay that way. That convenience makes it less likely people will pay attention to the amount. And just like with a credit card, it increases the likelihood of buying something compared to writing out a check or paying with cash. Now, within mobile wallets …  the ones that link directly to your bank account [like a debit card] still might keep you relatively more prudent because you have to do the math on …  do I have the money in my bank account?

CreditCardGuide.com: How does credit limit play a part in overspending?

Cheema: People who are not very well educated or very experienced with credit cards may often use that credit limit as an indicator of their future earnings. So, let’s say I get this offer in the mail that says “because of your great credit history and responsible spending, we want to give you a $5,000 credit limit card.” If I get one of those offers, I might believe, hey, this person wants to lend me $5,000 and they believe I have the capability to pay that off in the future. And so it makes me more susceptible to spend the money. Or, suddenly, my credit limit goes from $4,000 to $7,000. It might make me feel richer because I might take it as a signal that I will earn this money in the future. That’s why they’re giving me the loan. Essentially what just happened is that by increasing the credit limit, companies may influence people’s belief about their ability to earn that money in the future and … make it more likely that they spend the money right now.

CreditCardGuide.com: What’s the reality with credit limits?

Cheema: Generally, people believe that banks are very careful and scientific in coming up with that credit limit number … [We found] it wasn’t a signal of your ability to earn in the future, it was more a tool companies could use to make you spend more. At that point in time, the few bank managers we talked with about the process that is used to set the card limit revealed that it was not very scientific. If banks are not being very scientific or prudent in setting these credit limits, then letting consumers know about it might shield them from this inference process that makes them think, hey, I will earn that in the future.

CreditCardGuide.com: But that’s not in banks’ best interest.

Cheema: Yes. No lender would want to tell the recipient we’re just doing this to make you spend more. One of the hopes is that maybe they will develop a more prudent way of developing credit limits. We haven’t seen any movement in that direction. When we looked at it 10 years ago, it was not a very scientific process. Events in the last three years may have changed that, but I don’t know.

CreditCardGuide.com: Why don’t consumers consider Annual Percentage Rate (APR) as much as they should when choosing a credit card?

Cheema: One of the primary beliefs that most card subscribers have is that they will pay off the entire balance in three weeks. They think that the APR should not matter so they are being drawn by whatever other benefits the card offers. In reality, that isn’t always the case.

CreditCardGuide.com: What’s your best tip for using your credit card during the holidays?

Cheema: The ideal would be a layaway plan … or a prepaid card or gift card. Ideally, you want to be able to set aside some money. Often banks will let you create a separate sub-account in your bank account. Another way that people could do this is to use different types of credit cards as long as the cards don’t have an annual fee. When you are buying groceries, you use the credit card that is for necessities … When I am going and splurging, then there is this other credit card on which I’ll never carry a balance. I know that if I’m not able to pay that balance off, then it will cost me, not just financially but also emotionally, because I realize I’ve spent money on something I shouldn’t have. That would be another way to clearly demarcate expenses that you can say no to and those that you cannot say no to. [If you have one credit card, expenses can get lost] in the morass of your monthly statement. [With] a splurging credit card you have to pay more attention to it and think more carefully about it because that in itself is a cue that this is not a necessary expense for you.

All royalties from “Transformative Consumer Research for Personal and Collective Well-Being,” are donated to the Association for Consumer Research to support Transformative Consumer Research grants. The book, published by Routledge Academic, is available at ConsumerPsychologyArena.com.