America’s Problem With Using Credit Cards
Credit cards aren’t solely used in America, yet no other country seems to wholeheartedly embrace the idea of paying for products with plastic the way America does. According to NerdWallet, in 2009 156 million Americans had at least one credit card, which accounts for about half the country’s population. Further, experts estimate that the average American is carrying between $9,000 and $15,000 in credit card debt.
While emerging economies such as China and Brazil have seen a noticeable uptick in credit card use in the past decade or so, no other country comes close to being quite as reliant on plastic as Americans are. For instance, while Canadians also charge many of their purchases, they tend to be much more responsible about it. In fact, 64% of Canadians pay their balances off in full every month.
So clearly, we are a nation (perhaps the nation) of credit card users. But if credit cards are so troublesome, why do we use them? There has to be some reason why we’re so tied to our plastic, right? They can’t be all bad.
The truth is, there is something to be said for credit cards. After all, as Derek Thompson wrote in his expansive Atlantic article decrying credit cards, “people rarely spend exactly what they earn, exactly when they earn it. With savings, we pass today’s earnings to the future. With credit, we pull expected future earnings into today.”
The problem comes when we, as flawed human beings, misuse credit cards, either on purpose or by accident. People, regardless of how savvy they think they are, tend to underestimate the amount they need to save and overestimate their ability to pay their debts back in a timely manner. So while under ideal conditions everyone would use credit cards in a responsible way, as a kind of interest-free short-term loan that also happens to help provide a record of your fiscal responsibility to other lenders, most of us have a hard time visualizing cash that comes off a plastic card. The result? We overspend.
Because of this inability to visualize the money you’re spending when you use plastic to pay for things, your inhibitions about spending decrease, and decrease quite dramatically. According to one well-known study titled “Always Leave Home Without It,” and publishing in 2001, “framing hypothetical purchases as credit card payments may significantly increase purchase likelihood and willingness to pay.” In one scenario, researchers found that people were willing to pay twice as much for a product if they were paying with a credit card as opposed to cash.
Part of this phenomenon has to do with the way our brains work. When you pay for things in cash, pain centers in your brain are activated by the act of giving away your money. But when you swipe plastic, those same pain centers are not activated. This is because when you pay for something in cash, your brain is able to couple the money and the thing that you paid for together. You inherently understand that you just gave something away in order to get the thing you wanted, in other words. But using a credit card actually de-couples this link, allowing you not to feel that tug of discomfort you would experience if you had to fork over the cash, according to researchers.
As a result many experts argue that if your goal is to limit your spending, it’s best to “carry cash with you…if we give ourselves opportunities to use a painless payment method, we’ll also be giving ourselves opportunities to overspend,” noted Hal E. Hershfield, an assistant professor at the UCLA school of marketing, in a piece he wrote for Psychology Today.
George Loewentstein, a Carnegie Mellon professor of social science and decision sciences and one of the authors of the study Hershfield cites, notes that credit cards affectively “anesthetize” the pain associated with a transaction by allowing us to delay payment, a function that also goads us into spending more.
It certainly seems that Americans have become more comfortable charging their purchases. According to the Atlantic, per capita credit card debt increased 1,500% between 1980 and 2010. Even more depressing is the fact that roughly two-thirds of Americans don’t even know how credit cards work, according to a 2009 study.
Another revealing detail about credit card use is this: countries which use credit cards less tend to save more, while countries that charge their purchases frequently are more likely to live above their means. According to NerdWallet, the average Frenchman only charges about $267 dollars a year, but he saves about 10% of his income. In contrast, an American on average charges around $4,236 but saves just 4% of his earnings.
So what’s the solution to the overspending so many of us are tempted to do when we use credit cards? Should we all just cut up our plastic and go cash-only? Not necessarily. Credit cards, as we mentioned earlier, do serve a purpose, and they can be used wisely. But if you do some digging into your own financial history and find that you tend to overspend when you use a credit card, take some steps to ensure that you’re less tempted to overspend.
If you’re carrying a balance, it might be a good idea to leave your credit card at home until it’s paid off. Even if you do pay your balances responsibly, but would like to save more, it might be worth it to keep a record of your transactions so that you’re forced to evaluate each purchase you make when you swipe your card. Anything you can do to help re-couple the link between your purchases and your money puts that much more into your wallet, and robs the credit card companies of the fees, interest, and other charges that makes them the industry everybody loves to hate.