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Curse of the Credit Cards

Let's discuss the Curse of the Credit Cards.

By Michael WestPublished 3 years ago 5 min read
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Curse of the Credit Cards
Photo by Avery Evans on Unsplash

Introduced to make our lives better and our consumption smoother. But quite frankly did they not give us more sorrow than relief?

I have previously published a historical overview of the evolution of payment methods. The main focus is on the credit card's launch and uptake. The credit card was accepted easily and became a standard for every single household. It was presumed at the time of its introduction that money was fungible. This implies that the system used to invest the money does not matter, the consequences will be the same. The credit card would therefore, replace cash without any side effects. However when it comes to credit card use, study has found plenty of side effects. I will outline the most pressing problems in this article.

Indebtedness

There is no denying that a massive problem is credit card debt. The Money Charity's figures show that in the UK, the average credit card debt is a staggering £ 4,087 per adult. In May 2018, gross credit card debt was 71.6 billion pounds. It is £ 2,634 per household. It will take 26 years and 5 months to repay the entire balance, taking into account the average interest rate on a credit card. This assumes that every month, most households just repay the minimum.

A major problem is that all these numbers are records that are large at all times. An even greater concern is that these numbers keep on increasing...

Knowing these figures, it is not shocking that there is clear evidence that customers who primarily use credit cards overspend more than those who do not (Runnemark, et al, 2015; Soman, 2003; Tokunaga 1993). Prelec and Simester (2001) also say that they always leave home without it since the mere option of credit card payment increases the desire to pay for a good or service. This rise in willingness to pay is because the credit card does not mean a limited amount of resources, unlike cash.

There is no end to the list of studies showing higher spending on cards compared to cash. And I would like to suggest explanations why using a credit card contributes to substantially higher spending, rather than explaining all of these reports.

Regulation of impulses

The credit card's increased expense and debt accumulation have been blamed on its failure to limit impulse control. Cash is excellent at limiting impulses: you can't waste it if you don't bring (enough) cash. No such extreme credit card cap exists. The only real cap is the overall balance, which most providers of credit cards are able to raise if you just ask politely...

The problem with urges is that in order to resist them, most people require punishment. When using cash, punishment is given. Paying with hurts cash. You know how much you are paying, precisely. You can see the cash is leaving your side. This exchange is a tangible one. There is a feeling of loss (Zellermayer, 1996).

This method is made much simpler by the credit card. There is no real cap, as has been said before. This leaves your hands with no physical meaning. There are diminished or no loss sensations. In blissful ignorance about how much you already have invested and how much is left, the purchase is finished. This encourages further investment.

Spending is not the only impulsive activity encouraged by a credit card. A clear association between credit use and unhealthy food purchases is found in research by Thomas et al (2011). Those using credit cards were more likely to have bought sweets, soft drinks and fast food relative to individuals who paid for their groceries by cash.

Now with an infinite amount of credit, surrounded by fast-food, you live on a high. Life is good. Until you receive a bill for a credit card twice the size of what you thought it was. When has this occurred? Once more?!

About memory

It is difficult to constantly track your spending and credit card balance. Tracking cash spending is easy. You see, literally, what you lose, and what's left. No matter how closely you look at a credit card, your credit card balance will not be mysteriously exposed by its plastic glow.

Research by Raghubir and Srivastava (2008) has shown that individuals have trouble memorizing their credit card bills. People are highly unreliable in calculating how deep in debt they are when it comes to various expenses. "Mention specific expenditure categories, such as How much did you spend on your credit card, going out for dinner, by using leading questions? The figures improved but were still far from precise. It would not be shocking to find that their credit card bills have been underestimated by most people. In calculating their expenses, people who were asked to measure their cash expenditures were far more correct, whether or not the questions asked were about particular spending categories.

Gross and Souleles (2002) also claim that increased credit card spending is linked to reduced understanding of spending, causing individuals not to update their account balance appropriately and to spend money twice. People were asked to estimate both their balances and expenses in their survey, and their responses were compared to their bank account results. The more expenses were made, the less precise the measurement was. In addition, those who were the most likely to continue spending on their credit cards were the ones who had the least reliable figures.

But that's the credit card: increased debt as a result of decreased impulse control and decreased recall performance of spending.

Just a rough description of the tip of the iceberg is what I have touched upon here. In the next post, I will address the reduced salience of credit card spending that drives the impaired control of impulse: the pain of paying.

Among many other great posts, the sources used in this article can be found in Money on the Mind

Thank you for reading till the end, I hope you might have liked this information, in case you are more Interested in knowing about Credit Cards, then also checkout our blog ArcoResources for such detailed guides. Thank you once again.

personal finance
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About the Creator

Michael West

“Before you speak, listen. Before you write, think. Before you spend, earn. Before you invest, investigate. Before you criticize, wait. Before you pray, forgive. Before you quit, try. Before you retire, save. Before you die, give.”

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