The proliferation of non-cash forms of payment like credit and debit cards, Pay Pal, gift cards, phone apps, and online bank payments is making it easier for people to spend too much money. The temptation to overspend is especially acute for “young adults weaned on e-transactions,” says Boston College’s Center for Retirement Research.
“When it doesn’t feel like money, people don’t treat it like money,” reports Priya Raghubir, a professor at the New York University Stern School of Business, and co-author of a 2008 paper, “Monopoly Money: The Effect of Payment Coupling and Form on Spending Behavior.” Why do credit cards have the effect they do? Researchers say it all comes down to separating, both in time and space, the pleasure of the purchase from the pain of actually paying for it. Previous studies have shown that people are less aware of actual prices when paying by credit card (think of it as akin to driving a car with no speedometer).
While credit and debit cards are undoubtedly convenient, they can be toxic to people who have a hard time controlling their spending. And once you’ve fallen into the high-interest rate credit card hole, it can be almost impossible to dig out.
Taming an addiction to plastic is easier said than done. In fact, one of the most challenging problems we face is helping clients who overspend to rein it in. Here are some tried-and-true techniques that can help:
Put it on ice. The famous “credit card in an ice cube” method cuts down on impulse buying by making you wait to spend.
Make a list. Just like at the grocery store, buying only what’s on your list can be an effective technique.
Write it down. Keep a small notepad to jot down every credit and debit card charge throughout the day, totalling as you go. People have a hard time keeping track of what they spend in their head, and usually spend twice as much as they think they do.
Defer it. It it costs over $20, make yourself wait, and think it over at least 24 hours before buying. Ask yourself why you are buying the item, and whether it will get in the way of obtaining more important items on your “financial goals” list.
Pay it off first. Make a rule…no using credit cards to buy anything new until all your existing credit card balances are paid off in full. That’s a reminder to use credit as a convenience, not as a means to borrow money.
Cash only. It may be inconvenient, but it works. Eschewing credit and spending “cash only” definitely cuts way down on your spending. After all, cash is real money!
Please share with us what works for you to keep your credit cards and spending under control!