The increasing use of credit cards is resulting in many unintended consequences for personal budgets.
Here are 4 reasons you should get rid of your credit card.
Believe it or not, the biggest risk in going cashless (i.e. not using cash anymore) is not in the potential for fraud, but the potential for negative implications on your spending habits.
The good news is that people are using debit cards more, however credit card use is also rising.
1. You Spend More Freely
You don’t feel the pain of a purchase when you spend using a credit card as opposed to cash.
- Lowenstein (2007) found that credit cards effectively anesthetize the pain of spending (and this was evident in brain scans)
“Credit cards effectively anesthetize the pain of paying. You swipe the card and it doesn’t feel like you’re giving anything up to make the purchase, unlike paying cash where you have to hand over bills.”
- Feinberg (1986) found that the probability, speed and magnitude of spending all increased when credit cards cues (i.e. a credit card logo) were present
- Runnemark, Hedman & Xiao (2014) found that you will even spend on a debit card as opposed to using cash.
2. You Spend More Money
Deep down you know that you tend to spend more when using a credit card.
Now there are a number of studies that actually prove that people will tend to spend more using credit as opposed to debit, or cash.
- Prelec & Simester (2000) found that your willingness to pay may increase by up to 100% when using credit as opposed to cash
”Subjects paying with cash found roughly $30 to be a reasonable price for basketball tickets, while those paying with credit on average were satisfied with $60.”
- Poddar, Ellis & Ozcan (2014) found that people would spend 10% less if their running credit card balance was printed on new purchase receipts
3. You Make Poor Spending Decisions
This is a worrying development, but one that ties in with point 1 – you don’t feel the pain of spending, so if you used plastic instead of cash, was it really you who made the purchase?
- Thomas, Desai & Seenivasan (2011) found that people were more likely to buy unhealthy food products when the paid using credit card instead of cash.
”Since paying in cash feels more painful than paying by credit or debit cards, paying in cash can reduce the purchase of unhealthy food items.”
4. The Interest Costs Are Exorbitant
Not only are you up against the odds in points 1-3 above, when you do fall in the trap of not being able to pay your credit card off, the bank will hit you with interest costs between 10 and 20% p.a.
Plenty have fallen into this trap, with the average Australian credit card holder now paying $752.28 p.a. in interest:
- If you use a credit card, the odds are you will spend more money
- Your brain works differently depending on which spending option you use
- From a wealth building perspective there isn’t really any upside from using a credit card
The information on this blog and website is of a general nature only. It does not take into account your individual financial situation, objectives or needs. You should consider your own financial position and requirements before making a decision. We recommend you consult a licensed financial adviser in order to assist you with this.