Ever felt like having a credit card has led to debt you wouldn't have had otherwise? You're not alone. In fact, a growing body of research indicates that credit cards often act as spending facilitators, causing users to spend more than they would without the plastic.
In fact, the average family made credit card purchases that totaled 33% of its income in 2000, up from a mere 4% in 1970. And today, 15% of cardholders owe more than $10,000 in credit card debt, and about 17% make only the minimum payment each month.
To understand how credit cards nudge us to spend more, it's important to get some background.
Many people don't realize that credit cards actually serve two functions: making transactions and borrowing money. But understanding this, and knowing how you use your card, can make a big difference in how much you spend.
People who use their cards strictly to buy items and pay their full balance each month are known as transactors. Effectively, transactors use their cards for free, since they never end up paying interest.
"Revolvers" (or Borrowers)
Revolvers are people who use their credit cards to take out many mini-loans: they don't pay their full balance each month and accumulate debt. This "revolving debt" comes with high interest rates and costs more money the longer it takes to pay down.
The "Credit Card Effect"
It may seem obvious that transacting is the way to go. But, though many people plan to avoid paying interest on their cards, most people eventually do. This can be attributed to the "Credit Card Effect," described in a study by Oren Bar-Gill: it's easy to spend, so most people do. Here are some factors that lead to spending more than planned.
So how exactly do people move from well-intentioned transactors to struggling revolvers? A study by Angela Littwan found the following cycle among those with serious credit card debt.
Unsurprisingly, many of Littwan's subjects ended up with a negative opinion of credit cards. Here's why.
Many of Littwan's subjects noted that they didn't fully understand the terms of their credit cards when they began charging. Bar-Gill's research suggests that this is no accident.
Credit card companies, his study suggests, know that borrowers tend to underestimate how much they'll borrow in the future. Here's how a typical credit card can end up costing users while making issuers big money:
So how can you keep your plastic from making you pull the spending trigger? Here are a few tips.
Remember: you're not alone. Credit cards are designed to get you spending and keep you spending. Understanding how they're likely to affect you will prepare you to use them wisely and efficiently.