There’s one topic in personal finance that can quickly divide the community: credit cards. Some experts are in the credit-cards-are-evil camp, while others are rewards junkies who espouse the many benefits of credit cards.
Avoiding credit cards can help you avoid debt, but make it harder to build your credit. Having a credit card can help you establish good credit and earn rewards, but also get you into debt trouble. Clearly, there are pros and cons to owning a credit card.
However, one of the biggest reasons experts recommend avoiding credit cards is the idea that they encourage you spend more than you would with cash. But is that really true?
Credit Card Spending Statistics: The Psychology of Plastic
The act of swiping a credit card is mindless: swipe, sign, and you’re done. Paying with cash, on the other hand, can be a little more painful. Physically departing with your hard-earned cash can be tough and make you think twice about your purchase.
According to Psychology Today, credit card spending also desensitizes you from the pain of spending and actually incites desire to consume. For instance, several experiments conducted in the 1980s by Richard Feinberg proved the correlation between credit cards stimuli and spending. The studies found that cues such as visible credit card logos incite a Pavlovian desire to spend.
An important 2001 study, “Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay,” conducted by Drazen Prelec and Duncan Simester of MIT’s Sloan School of Management found that participants were willing to pay almost twice as much on tickets to a Celtics game if paying with a credit card, compared to paying with cash.
It’s been proven people are willing to pay more when using a credit card. Credit cards, with the benefit of “buy now, pay later” and the lure of rewards can lead to overspending.
How to Keep Your Credit Card Spending in Check
So does this mean you should not have a credit card? It’s been show there are several disadvantages of using a debit card only, so that might not be the answer.
Whether you currently have a credit card or are thinking of getting one, there are a few ways you can keep your credit card spending under control:
- Use your credit card only for fixed expenses. You can curb the temptation to overspend by using your credit card for recurring, fixed expenses like health insurance or Netflix. The prices will remain the same, so there’s no risk of spending more just because you are using a credit card.
- Always check prices. This might seem obvious, but it’s important to always do a price comparison when paying with a credit card. I know I’ve been more meticulous about checking prices when I have cash on hand, rather than when I’m paying with a card, usually because I have a finite amount of cash on me. If you’re using a card, check your prices and don’t settle for convenience.
- Stay within your budget. It’s easy to swipe away and not really think about how much you are spending until your payment is due. It’s important to stay within your budget and not succumb to overspending because you’re using a card. You can sync your credit cards and create a budget using a tool like Mint.com.
- Make sure you have the cash for it. Paying with a credit card may be more convenient and offer more protections than paying with cash or a debit card, but you could easily pay for things that you technically can’t afford (yet). Always ask yourself, “Do I have the cash for this in my account right now?” If the answer is no, put the cards away.
- Go on a cash diet. If you think you might spend more with credit cards, or if you want to test it out, resolve to pay with cash only for a month. After your diet is up, compare your spending from the previous month to the current month.
Studies have shown it’s psychologically easier to overspend with credit cards. That doesn’t mean that you should ditch credit cards completely — simply be more mindful when swiping.
Always ask yourself, “Could I pay for this in cash?” Pay off your balances in full each month to avoid interest and late charges. Credit cards can be a helpful financial tool as long as they’re used responsibly.
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1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 5.87% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 5.87% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
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2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
6 Important Disclosures for Citizens Bank.
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