Don’t leave home without understanding
People spend more with credit cards. It is easy to understand. First, the convenience factor makes it much easier to blow through larger sums of money. Yet the bigger issue is having the ability to spend money you don’t have today, thus circumventing the need to budget to buy something. Take a look at some research regarding how people perceive value when spending cash versus credit:
“(The Atlantic) Prelec and Simester’s findings downplayed the importance of logos, but further solidified the theory that credit cards extract more money from people than cash in identical circumstances. The two researchers found that their Boston-based experimental subjects were willing to pay strikingly different amounts of money on tickets to a Celtics game, depending on their method of payment. Those paying with cash found roughly $30 to be a reasonable price, while those paying with credit on average were satisfied with $60. This Celtics experiment suggests that the premium is largest and most dangerous when people are making one-off purchases or buying things with uncertain value.”
That is a big issue. Another study found that two-thirds of Americans don’t even understand how credit cards work. This should give you pause given the recent rise in credit card debt after a slumber from the Great Recession:
From 2010 to 2014 outstanding credit card debt remained fairly stagnant. In the last year it has started to trend higher at a quicker pace. The volume of credit card offers increases in tandem with the stock market and the overall perception of the employment landscape. Offers are now being pushed lower on the financial food chain since demand for other avenues of investments pick up. This is why we are witnessing a large push of subprime auto debt.
There isn’t anything inherently bad with credit cards. But the way they are marketed and the terms offered really lure people into spending money they don’t have on items they don’t need. Two-thirds of Americans don’t even understand how credit cards work! And then we wonder why half of the country has no money saved for retirement and most live paycheck to paycheck.
You might say that most of the non-cash transactions are coming from debit cards that pull from actual cash in checking accounts. Unfortunately most of the non-cash transactions occur in the form of credit cards:
The attraction is obvious and clear but the need for immediate gratification is going to be painful. Paying off a 60 inch television for five years is going to make you forget the high joy you get from that first year (or six months) of your purchase. Pretending to be rich is very different from being wealthy. In order to build wealth, you need to save and invest. Going into debt for things you don’t need is not wise financial planning.