The Credit Card Spending Effect -Total Bankruptcy
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Credit Cards Act as Spending Stimuli

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.

The Two Functions of Credit Cards

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.

  • Presence of credit cards: Studies have shown that shoppers are willing to spend more (up front) when credit cards or credit card logos are present.
  • Underestimation of future borrowing: Bar-Gill's study shows that most credit card users plan to use their cards as transactors, at little or no cost. But eventually, most users do borrow for one reason or another, suggesting that credit card ownership provokes borrowing.
  • Open-ended loans: Credit card loans can be dangerous because they're indefinite - you don't know at the time of purchase how much something will cost you including interest, late fees, etc. A harmless-seeming purchase can end up being very expensive.
  • Low-stakes borrowing: Most credit card transactions - a meal here, some gas there - are minor amounts by themselves. Revolvers tend not to realize how quickly so many little expenses can add up to thousands of dollars in credit card loans.
  • Optimism: Most people don't plan on major unexpected expenses or mishaps like medical emergencies or job loss - and so don't mind spending in the present, assuming they'll be able to pay in the future.

The Borrowing Cycle

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.

  1. Getting a credit card: Littwan's subjects most commonly sought credit cards to have for emergencies, to increase purchasing power, to improve credit scores and to see if they'd qualify for one.
  2. "Temptation:" In this phase, the subjects reported a temptation to use their cards. This reinforces the spending-trigger effect credit cards have been shown to cause. In this phase, the subjects became revolvers, paying less than their full balance each month. This phase ended when card issuers refused to raise the credit limit, subjects could no longer afford their minimum payments and/or subjects realized they were headed toward serious debt.
  3. Payoff Period: Here, subjects focused on paying off their debts and not accumulating any more. For many, this phase lasted several years.

Unsurprisingly, many of Littwan's subjects ended up with a negative opinion of credit cards. Here's why.

Credit Card Contracts: Exploiting Borrower Expectations

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:

  • Low Introductory/Teaser rates often listed much more prominently than long-term interest rates, encouraging users to focus on the short term and ignore the long term.
  • No annual fees, often in exchange for higher long term interest rates. For users planning to be transactors, this seems like a good deal, since they don't plan on accumulating interest at all. Because most users do accumulate interest, though, this becomes a bad payoff.
  • Minimum payment listed more clearly than total amount due. Thanks to the layout of many bills, users can run a balance - and accumulate interest - without even realizing they're not paying the full amount they owe.
  • High long-term interest rates that can get even higher if a user misses payments, sometimes on accounts not related to the credit card (universal default).
  • Small font, several page contracts filled with legal language that often discourage and frustrate cardholders. Many users don't read or fully understand their card's terms.

Tips for Avoiding Overspending with Credit Cards

So how can you keep your plastic from making you pull the spending trigger? Here are a few tips.

  1. Avoid late payments for all accounts. Card issuers that practice universal default will raise your interest rate if you miss payments.
  2. Limit your cards - if you want a card for emergencies, one will do. If you're shopping for one specific item, avoid temptation by leaving your card at home.
  3. Stop receiving "preapproved" card offers by mail. Visit, where you can sign up to stop getting such offers (and stop being tempted by their teaser rates!).
  4. Understand your contract. This may require meeting with someone familiar with legal language, like a bankruptcy lawyer, but you'll likely save yourself time, money and frustration in the long run.
  5. Keep the tags on everything for two weeks. By then, the thrill of impulse buying will have worn off and you can return items you don't really need.

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.

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