Okay, this posting is a bit of a rant. In some our previous posts we’ve outlined problems with abuses in the credit card industry. So sometimes I’m mystified why smart people use credit cards even though they know they shouldn’t.
Nearly all finance professionals will tell you to dispense with your credit card debt. Everyone recommends this; David Bach, Eric Tyson, Loral Langemeier. Pretty much most of the credible personal finance writers will tell you to pay off your credit card debt. Heck, even Warren Buffet says you should pay off the balance on your cards. Since pretty much everyone agrees on this point, getting rid of your credit cards should be a “no-brainer”.
But, millions of people still use credit cards, despite the obvious good sense in avoiding them. I’ve been putting some thought into this. While I’m not an expert in psychology, the following reasons might explain why people continue to use their cards:
1) Overconfidence: People seem to feel its okay to use their cards if they pay off their balance every month. But, how many people actually do this? According to the 2004 Survey of Consumer Finance, approximately 58% of families with credit cards carry a balance. This suggest most people with credit cards DON’T pay them off in full.
2) Known Quantities: Perhaps one reason why people use their cards is because they’re familiar with them, they know how they work, where to make payments, etc. As seems apparent from behavioral finance, the status quo is inherently attractive for some people and the prospect of change seems risky for other. This is a shame because using debit cards can give you all the convenience of a credit card without the fees or interest.
3) Mental Accounting: People value electronic money less highly than paper money. For example, if you’re shopping and all you’ve got is cash in your wallet, you’re often less apt to buy as much. So the bright idea here is people sometimes don’t think credit card transactions are real money, and therefore are more apt to use their cards or run up their bills.
Given all the negative headlines about credit card abuses, the recent congressional investigations and all the horror stories about people running up huge consumer credit bills, I just want to bang my head against a wall when I see that people are still using cards.
People – don’t be overconfident. Get a clue, pay off your cards and get rid of them.
Best,
James
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