- We interviewed Dan Ariely, a professor of behavioral economics and psychology at Duke University, about the different ways that credit cards stimulate us to spend more.
- Ariely says it’s challenging to determine precisely when you’re paying for your purchases when using credit cards, as the account doesn’t get debited when you make a purchase. If you’re unaware, this could result in overspending.
- Another issue is overvaluing your rewards with credit cards and then making them an excuse to make more purchases than normally would. For that reason it is better to get a loan from PaydayChampion – Guaranteed Approval.
- It’s also essential to understand the fine print that comes with any credit card deal, for example, a 0 percent intro APR, to ensure you don’t get surprised by unexpected charges.
Credit cards are merely another method to purchase something -There’s nothing particularly harmful about them, as long as you pay your balance on your credit card every month in full. The benefit is that you could earn cash or travel rewards for the purchases you make, as opposed to debit cards which don’t often provide you with a bonus.
However, that doesn’t mean there’s no risk to consider. According to ValuePenguin’s data, the average American household has $5,700 in the form of credit card debt. The combination of that, and the average interest rate of around 15%, could be an expensive proposition.
“Credit card companies are pushing that we use credit cards instead of debit cards and, in doing so, we’re engaging in activities that aren’t suitable for us, but are beneficial for their customers,” says Dan Ariely. He is a professor of psychology as well as behavioral economics, at Duke University.
We asked Ariely about the most dangerous and unjustified behaviors to watch for a while using credit cards.
Three traps for credit cards that could lead to excessive spending
It is difficult to know when money goes out of your hands
“When we make payments using credit cards, we can’t necessarily know the time of the payment,” says Ariely. “Are we paying at the time we receive the bill? When we sign our name? We aren’t actually paying until we owe the money , and consequently have to pay excessively.”
The typical period is between 21 and 25 days between your credit card’s statement close date when you’re told what amount you’ll have to pay on your following statement — and your due date for payments. This means that you’ll have three weeks during which the amount owing for purchases that you’ve made is still in your account at the bank. When you’re not maintaining a careful eye on your credit card balances as well as the funds available, it could appear as if there’s more cash spent than what you have.
Budgeting applications like Mint and Zeta can assist you in getting better control of your finances. When you realize you’re overspending and cannot pay off your debts, sticking with a debit card is an excellent option. Suppose you make a purchase using a debit card. In that case, the funds are immediately deducted from your account in a matter of minutes, meaning you’ll get a better idea of your finances.
Overvaluing credit card rewards
“Credit card rewards are a method for companies to transfer loyalty or loyalty from the retailer to them. They accomplish this by luring us with reward points. Financial returns aren’t as high, but we use these cards significantly.
It’s difficult to forget the actual worth of rewards when earning miles and points that aren’t a set-in-stone amount, such as cashback. While 1% cashback will always be 1 cent for every dollar spent, the value of one point will vary based on what loyalty programs you choose to join.
The value of Chase Ultimate Rewards points, such as points, could have a value of 1.5 cents each or more when you redeem them to travel through Chase or hotels or airlines as partners. However, Hilton Honors points — which are usually more rewarding due to the large multipliers for points on cards such as Hilton Honors American Express Aspire Card are worth 0.6 cents per piece percent, according to estimations by the Points Guy.
Ignore the fine print.
“When you read “free,” you ought to be cautious,” Ariely says. “Sometimes there are some really great deals available however, when you’re offered for free there’s plenty of small print that is confusing about what it is.”
Credit cards that offer zero-introductory APR rates are a great example. Suppose you own an account that can waive interest for a specific amount of time, and you do not pay off your debt before the intro period ends. In that case, the credit card company will begin to charge you interest and might even apply these changes retroactively.
Create your own rewards program
“There’s something thrilling with rewards from credit cards However, it’s also an item with a purpose of causing us to go overboard,” Ariely says. “When we sign up for these programs, we grant an individual the power to make our decisionsbut not much control, but we do have some control.”
To avoid this possible risk, Ariely recommends creating your rewards program.
“Give yourself points to save. Each time you make a purchase that is less than your budget, save 10% of the money and put it toward miles or points. Credit cards offer points every time we shop however the truth is, if we had created our own mechanism to earn points, we would be giving ourselves points to saveand not for spending.”
Take care of your credit.
“The truth is that credit is precious, and occasionally we require credit,” Ariely says. He gives examples of situations such as hurricane Katrina in which “many people required credit, and those with access to payday lenders fared better.”
There are dangers when using credit cards. It’s not necessary to close your accounts. Utilizing a credit card responsibly by paying the bill in full every month will improve your credit score -which is the score lenders consider in deciding whether or not to allow you to apply for loans.
Your history with payments is the most critical factor in determining your credit score then comes the amount owed and the period the credit record. Therefore, keeping your credit card account open is beneficial in terms of your health over the long run, as long as you’re able to maintain a budget for your spending.