How Credit Card destroy's your wealth ?
When you're a kid, a library
card is a magical item that can bring you seemingly unlimited access to joy and
wonder. For many adults, that's what a credit card does. People like to say
it's not good to carry a lot of cash around, but cards have their drawbacks,
too. What if keeping an empty wallet is emptying your bank account ?
Pick a Card, Any Card -
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Sure, using a
credit card can be great. You don't have to carry as much cash around, keeping
track of your spending is easier, and credit cards even help you save money.
But studies show that cards can also lead you to spend more than you would have
with cash.
·
In 2001, MIT
researchers Drazen Prelec and Duncan Simester gave business students a chance
to bid on three items: a pair of tickets to a sold-out game between the Boston
Celtics and the Miami Heat, a pair of regular-season Red Sox tickets, and a
consolation prize of one Celtics and one Red Sox banner. The students were
asked to indicate how much they were willing to pay for each item, with the
understanding that the person with the highest bid would get to purchase the
item for the price of the second-highest bid. They got no information about the
original price or the typical market value to eliminate any outside influence.
The only difference between the bidders? Some were told the payment had to be
made in cash; others were told it had to be made by credit card.
·
It turns out that
the students were willing to pay 83 percent more on average when paying with a
credit card than when paying in cash — and more than twice as much, in some
cases. In a second study, simply exposing students to a credit card logo was
enough for them to bid more for a gift certificate. That shows that the amount
you're willing to pay in cash isn't about how much cash you have on hand. There
seems to be something intrinsic to credit cards that makes you willing to pay
more.
Swipe Right -
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But why do credit
cards make you pay more? Marketing professors Promothesh Chatterjee and Randall
Rose wondered if it was because paying with a credit card actually changes the
way you perceive products. Their hypothesis was that credit cards make you
focus on a product's benefits while cash makes you focus on its cost. A study
they published in 2011 in the Journal of Consumer Research showed that hunch
was correct.
·
Before starting
the experiment, the researchers used a sentence-unscrambling task to prime
participants to think about either credit cards or cash: Half of them got
credit-card words like "Visa," half got cash words like
"ATM." Next, they saw a picture of a camera, along with a list of
details about its benefits and its costs, then they were asked to recall as
many of those details as possible. Those primed to think about credit cards
made significantly more recall errors about the cost attributes than the
cash-primed participants.
·
Of course,
increased spending can be a good thing if you're on the other side of the
equation, like a waiter at a restaurant. Studies show that even the presence of
a credit-card logo on a check tray leads to higher tips, even if a guest is
tipping in cash.
Mind Over Money -
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Why is this? When
you pay with cash, you're physically giving up a handful of bills, so you're
forced to think about the amount. But it's all too easy to mindlessly swipe
your card when an amount is just a number, and you have until the end of the
month to deal with your spending.
·
So how do you
avoid overspending with your credit card? Obviously, carrying more cash is an
easy fix, but paying in cash isn't always an option. Instead of changing how
you spend, try changing how you think. You can try thinking about money in
terms of hours of your life, and treating responsible spending like a daily
habit rather than a long-term goal. When you're about to spend a bundle, check
in on how you're feeling. If you're hungry, anxious, lonely, or tired, take
care of that first — then see if you really want those basketball tickets.
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