Using a credit card is as much about your emotions as your money. Here's what psychological researchers have learned, and how you can save money by using their results.
If you’ve ever wondered whether your credit card enabled you to buy something you don’t need, you’re on the right track. In fact, research bears this out – studies show that using a credit card affects what you buy, how much you pay, and whether you cave in to impulse purchases.
Check out some of the psychological traps credit cards present, and find out how you can avoid them…
Trap 1: Credit cards ease the “pain” of buying luxury items
Many studies point to consumers’ ability to reduce the psychological pain of an impulsive or expensive purchase by paying for it with a credit card. A study published last year in a journal called Social Psychological and Personality Science found that luxury purchases such as designer clothes, watches, and nice cars are more likely to be made with credit than cash – especially when these items fall under the category of “status consumption.”
On a psychological level, consumers actually evaluate whether to purchase a good by weighing the pleasure of buying and owning the item against the pain of its cost. Using credit reduces the pain.
How to avoid this trap: Rather than just signing the credit card authorization slip and walking away, take some time to think about what that money actually costs you on a personal level. This is especially easy if you don’t exactly love your job. Consider how much you earn per hour and calculate how many hours you spent (insert mind-numbing or physically strenuous activity of your choice here) for the purchase you are about to make. If that realization isn’t enough to make you put it back, go ahead and buy it.
Trap 2: Credit cards affect how much you’ll pay for the same item
In the same study, researchers assessed what percentage of the retail price participants would pay for a pair of designer jeans (a luxury item) using either a credit card or cash.
Those who were paying with a credit card were considerably more likely to choose designer jeans and pay a higher percentage of retail price. This effect was particularly powerful when those individuals were given what the study called “self-threatening messages,” or messages that threatened participants’ self-esteem.
The ability to use credit to purchase a status item combined with threatened self-esteem created a “perfect storm” that greatly influenced participants’ spending levels.
How to avoid this trap: If you’re in debt and struggling to pay your bills, but you still find yourself standing at the cash register with a pair of designer jeans in hand, think about what you are doing and why. You might still buy those jeans, but if you can understand some of the reasons you did, at least you’ve made progress.
Trap 3: Credit cards lead to impulse buys
Much like large and luxury purchases are more likely to be made on a credit card, so are small and impulsive ones. This relationship was illustrated most clearly in a study conducted by Cornell University, published this summer in the Journal of Consumer Research.
The study found that paying for grocery purchases with a credit card significantly affected the amount that people spent on non-essential items that weren’t on their list. But paying with a credit card had no effect on how much they spent on planned grocery purchases.
Using a credit card for planned purchases may not lead you to spend more, but you may be more likely grab impulse items. In fact, participants spent nearly 20 percent more on impulse buys when using their credit cards.
How to avoid this trap: First and foremost, whenever you shop, always take a list, and don’t ever buy anything that’s not on it.
Then, take a close look at your credit card statement. Federal law now mandates that these statements must show how long it will take for you to pay off your credit card balance if you only pay the minimum each month. Depending on your card’s interest rate and terms, it could take decades to pay it off. While it’s possible you could remember a pair of designer jeans 10 years from now, you definitely won’t remember the package of Ho Hos that made them hard to fit into – if you used your credit card to buy them you’ll still be paying for both.