The "Sting" of Spending

When they are used responsibly, credit cards can be a very valuable financial tool. In most cases, they are more convenient and safe to carry than cash. Also, credit cards allow customers to maintain the same standard of living over time, even in seasons where funds may be slim, by borrowing from the future. However, credit cards should also be used with caution for a number of economic and psychological reasons.

 In our recent short series on Retail Credit Cards we discussed some of the Pro’s and Con’s of obtaining and using retail credit. What we did not discuss are some of the reasons why we may be more inclined to make certain choices about credit. Have you ever noticed that when a project is near completion you may feel more motivated to get it done? This is because the end is in view and you know your work is nearly complete. This same psychological principle is at work when we make financial decisions.

 According to retail therapist Scott Rick, “the urge to pursue goals closest to completion drives people to focus on repaying small debts first.” This can be a deceptive mistake in many cases for one simple reason, interest. Interest rates determine how much the borrower will repay over time and should inform the urgency with which a customer repays a debt. Rick’s experimental research also suggests that “credit cards can stimulate overspending: People are often willing to pay more for the same product when using credit than when using cash.” But why? By answering his question, perhaps we can curtail some of our irresponsible spending and preserve our pockets!

One thing that you yourself may have observed is that it is much easier to swipe a card than it is to hand over cold, hard cash. Swiping rather than paying cash numbs the pain of payment. We feel less of the immediate sting of giving away that which we have worked so hard to earn. Whether you are a tightwad, rarely feeling any expenditure is justified, or a spendthrift, finding reasons to justify nearly any expenditure, swiping a card makes it easier to spend.

With some people, credit not only numbs the pain of having to pay but actually stimulates a desire to spend. When a customer is approved for a line of credit this, psychologically, gives the borrower a benchmark against which to compare prices. An $80 item that may have seemed expensive with only $100 in hand to spend, may seem relatively affordable or even cheap in light of a $1000 available credit limit. 

Calculating a running tally of purchases to determine your exact current credit card balance is much more complicated and tedious a task that simply recalling one’s credit limit. Unfortunately, most credit cards to not offer warnings when a customer is approaching his credit limit. Perhaps a card that changes color to reflect the amount of funds available would serve as a deterrent to some for fear of the social stigma of using a nearly maxed-out credit card. For others a simple notification or alert on a mobile device would suffice. Most credit card companies do not offer such features, however, because it's simply not good business. 

Those credit card holders who regularly use credit and repay their balance in full each month have little need for concern. Others who like to lean more heavily on their credit to finance their lifestyle or even carry credit card debt would be most likely to benefit from the types of interventions and technology mentioned. At the very least, allow this to serve as a reminder that what we need and want are two completely separate things and a responsible spender knows the difference.

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