How credit cards convince consumers to overspend
Nick Clements confirmed for me what I have long believed. The financial services industry makes us overspend.
Granted, it’s our choice whether to whip out that credit card or use cash. But the companies make it tempting with reward points, cash back and the like.
“Credit cards make it easy to shop without thinking,” said Clements, founder of New York-based MagnifyMoney, a personal finance website. “If you don’t have a budget, it is incredibly easy to spend just a bit more than you should. Countless studies show that spending with plastic means that we spend more. And we don’t just spend more money in absolute terms. We will actually pay more for the same item.
“One of the more famous studies showed that, in some cases, people were willing to pay double for an item when they used a credit card. When we pull plastic out of our wallet, we are no longer savvy shoppers.”
Clements said there are three reasons credit cards get us to spend more than we should:
The credit limit is usually a multiple of our monthly income. “With that high credit limit, it is easy to spend too much.”
Without the pile of cash in front of you getting smaller with every purchase, it is easy to spend more than you want. Seeing those bills disappear from your wallet hurts.
The minimum payment is usually only 2 percent of the balance. “That makes it very easy to make a small pay- ment today to get through the month and worry about the debt tomorrow.”
In a recently released survey, credit bureau Experian said most vacationers spend more than expected when traveling.
“People want to come home from vacation with happy memories, not with unanticipated and unmanageable credit card bills,” said Guy Abramo, president of Experian Consumer Services.