Credit cards can come with myriad benefits, but they may also have a few detriments, such as providing a false sense of security. Although not every single American household has a credit card, in some cases those that do are becoming increasingly dependent on them. This is not always a detriment, as credit cards can provide emergency funds in a pinch or act as a loan for larger purchases.
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Credit cards may become a danger when households forget they need to pay the credit card bills. When you can’t pay your credit card bill, this is where poor budgeting and high interest rates can create high debt, debt you may think can be handled simply by using more credit cards.
How do credit cards affect spending habits?
People generally spend more money if they are using credit cards instead of cash, according to Psychology Today, a habit that can add to a credit card’s detriments. A few studies backed up this phenomenon, several of which were mentioned in a Marketing Letters issue from 2001.
One study included a scenario that involved purchasing professional basketball game tickets that had already sold out. One set of study participants were advised they were going to try to purchase these highly coveted tickets using a credit card while the other set was told they were going to pay cash. The credit card users were quick to bid about twice the amount than the cash users were willing to pay for the exact same tickets.
Why do people spend more money with credit cards?
People may spend more using credit cards than they do using cash for a number of reasons. Paying with cash can make it much easier to realize just how you’re spending.
Using a credit card can make it easier to imagine the purchase comes from free and easy money.
People may also tend to forget how much they are spending when they use a credit card, Psychology Today says. It’s easy to notice when a fat wad of cash in the wallet suddenly becomes slim. With no immediate tangible evidence in hand, credit cards may be easier to throw around for a purchase here, another purchase there without keeping tabs on the actual spending calculations. That is, of course, until the bill comes.
Maintaining a budget as you go along can be difficult with credit cards, since you would have to either remember or record every single purchase along the way. Cash is much easier to regulate by only taking an amount you intend to spend.
What else plays into the false sense of security?
The overall view and attitude about credit cards can also play a part in the false sense of security they may bring, according to an article at Investopedia.com. Once upon a time, buying on credit was something people tried to avoid, even counting as a mark of shame in some circumstances. Somewhere down the line, that attitude shifted, with credit cards going from shameful to attractive.
Investopedia blames the shift on a public relations campaign, which may make sense if the campaign came from credit card companies as a way to push their products. Not many folks would want a product that brings them shame or debt in the form of a high-interest loan. However, many would jump on the bandwagon that promised free and easy money for anything you desire and jump on they did.
This is not to conclude that every single person who has a credit card or even several credit cards falls prey to the potential dangers. The false sense of security may not even be an issue in many cases, and even those who have previously been drawn into debt can learn to use credit cards wisely.
Wise use can mean keeping track of a budget and ensuring you stick with it. It also means paying off your bills when they are due.
It may also be wise to shop around and do your research to choose a credit card that matches your lifestyle and provides benefits that could be useful. Keep in mind that a credit card is not meant as an end-all to all your financial woes but rather a tool you can use to help, rather than hurt, your budget.
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