If you're someone who can't seem to keep your balance low on your credit cards you're not alone. Let's face it: credit card companies make their money on the interest paid on carried-over balances. For example, let's say you have a $1000 balance on your credit card with a 20% APR. You can only afford to put $50 a month down each month to pay your bill. By the time you pay off your balance completely, you'll pay an additional $227 in interest.
We know this going into applying for a credit card, but many of us will still keep a balance and overspend close to or past our limits. Science does offer a number of reasons why so many people can't control their spending when they use a credit card. If you have experienced any of these sensations you may want to consider keeping the credit card at home and only paying with cash:
Credit Card Premium: Scott Rick, Ph.D. wrote a piece in Psychology Today, discussing the phenomenon of credit card premiums. Even when other factors are cancelled out, people will spend more with their credit cards than if they used cash. Rick attributes this to the fact that it is more psychologically painful to hand over money than to have a credit card swept. He also cited studies from Richard Feinberg that showed that the mere presence of credit card logos can stimulate spending.
Justifying a Purchase: Let's say you have a limit of $5,000. Purchasing a $7 burrito at Chipotle doesn’t seem like that big of a deal when compared to your limit. However, do that enough and the balance will quickly jump up. Now let's use the same scenario but you only have $10 in cash on hand. You might pack a lunch instead. Suddenly that $7 is much more valuable. Although you would have spent the same amount of money, cash can sometimes put things in greater perspective. Just because you have a high limit, that doesn't mean you have that money. You'll eventually have to pay it back.
Is There a Solution?
For some people, credit cards can be the problem, but for those who have been burned in the past, they could be the solution as well. Secured credit cards exist to help those with poor credit. The best secured credit cards to rebuild credit will feature low fees, report to all three major credit bureaus, and have an education program in place to help individuals learn good personal finance tips. It might be a good idea to apply for one to help you rebuild your credit if you have had trouble with unsecured credit cards in the past.
We know this going into applying for a credit card, but many of us will still keep a balance and overspend close to or past our limits. Science does offer a number of reasons why so many people can't control their spending when they use a credit card. If you have experienced any of these sensations you may want to consider keeping the credit card at home and only paying with cash:
Credit Card Premium: Scott Rick, Ph.D. wrote a piece in Psychology Today, discussing the phenomenon of credit card premiums. Even when other factors are cancelled out, people will spend more with their credit cards than if they used cash. Rick attributes this to the fact that it is more psychologically painful to hand over money than to have a credit card swept. He also cited studies from Richard Feinberg that showed that the mere presence of credit card logos can stimulate spending.
Justifying a Purchase: Let's say you have a limit of $5,000. Purchasing a $7 burrito at Chipotle doesn’t seem like that big of a deal when compared to your limit. However, do that enough and the balance will quickly jump up. Now let's use the same scenario but you only have $10 in cash on hand. You might pack a lunch instead. Suddenly that $7 is much more valuable. Although you would have spent the same amount of money, cash can sometimes put things in greater perspective. Just because you have a high limit, that doesn't mean you have that money. You'll eventually have to pay it back.
Is There a Solution?
For some people, credit cards can be the problem, but for those who have been burned in the past, they could be the solution as well. Secured credit cards exist to help those with poor credit. The best secured credit cards to rebuild credit will feature low fees, report to all three major credit bureaus, and have an education program in place to help individuals learn good personal finance tips. It might be a good idea to apply for one to help you rebuild your credit if you have had trouble with unsecured credit cards in the past.