Question: How Do Credit Cards Make It Easier for Us To Overspend?

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Jul 10, 2015
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Behavioral Finance, Question of the Day, Credit Cards, Video Resource

A good article highlighting the psychological differences between buying with credit vs. cash and three ways that credit cards can lead to overspending:

  • 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 payment today to get through the month and worry about the debt tomorrow.”

Here is a great three minute video that demonstrates the third point with a pitcher of water (when I showed this in my personal finance class, students were amazed and didn’t understand how consumers could be so “dumb”):

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Check out this NGPF Activity, Calculate: Paying With Interest

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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