The increasing use of credit cards are a part and parcel of life now-a-days with the advantage of rewards, cashbacks etc., for everyday purchases. Credit cards, however, have a hidden psychological trick attached, which eventually, leads you to over-spend. You can manage your finances better if you understand the psychology of spending with a credit card.
Understanding the psychology of credit card spending
Credit cards exploit the reward impulses in an individual’s brain and thus can lead to over-spending. When one pays with credit cards, the brain’s reward center, which is the striatum, is activated, similar to drugs like cocaine and amphetamines. The activation of the brain itself creates an expectation of pleasure and thus can cause over-spending without the explicit economic impact. In simpler words, it is easier to just spend if you have credit with you, knowing that you have time to repay it later.
There is a famous quote of Christopher Parker that sums up the induced over-spending: “Procrastination is like a credit card: it’s a lot of fun until you get the bill.”
The function of rewards and cashback
Reward programs are designed to incentivize spending, with the incentive being in terms of travel miles, discounts, or cash back. Several Indian banks offer such incentives to get customers to spend. The objective of the banks here is to secure customers and to keep them engaged. While such incentives are useful, they can also instigate over-spending if not managed properly.
For example, if you use a credit card that offers you cashback while dining out, you will find yourself dining out more frequently in order to utilize the rewards, even if it is beyond your budget.
Methods to prevent overspending
In order to prevent you from overspending on credit cards, following are some methods to prevent the same:
- Budget: Choose a fixed spending amount and adhere to it. Budgeting and financial planning tips and tools are provided on prominent finance websites, take help from them to build a budget strategy.
- Tracking expenses: Track your expenses frequently to see that it does not exceed your budget. Mobile applications for tracking transactions and spending notifications are generally provided by banks.
- Spending cash on small purchases: On small transactions, cash spending will be more careful of your expenditure.
- Saving even while spending: So while going for a lucrative product try to understand the use of the same for you. Think long-term and only invest in it if it is indispensable.
- Your credit limit is your future: You need to be clear, spending lavishly today means you are sacrificing your future. Try to look at money and credit in literal terms and make practical real life decisions. Focus on conservation and sensible spending.
Therefore, by understanding the psychological reasons of credit card use and having your spending under your control, you can utilize the benefits of credit cards while protecting yourself financially. Always remain sensitive to wise ways of spending money to keep you out of the debt trap. The reason for the same is that a credit card debt trap is cyclical. It is very difficult to overcome the same. That is why managing your credit utilization ratio always is of immense importance.
Credit cards are risky if one uses them irresponsibly. They carry steep interest rates and charges, and if not kept in check, they can lead to debt that keeps on mounting. Hence, the users should wisely understand their finances and compare other modes of payment before they rely heavily on credit cards.
(Note: Using a credit card carries its own set of risks)
