Dr. GoodCents: The Logic and Psycho-Logic of Credit Cards

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drgoodcentscreditcardsA clinical psychologist with nearly 30 years of experience, Dr. Shapiro is ready to answer questions, offer advice and share strategies to help you alleviate the mental stresses of money management. Send your question to GoodCentsDr@gmail.com and it may be answered in an upcoming column!

Credit cards seem like such a nice idea. There’s a product or service you could use right now, but you don’t have the money to pay for it at the moment. The easy solution is: Just charge it! You won’t have to wait for a purchase you can start enjoying right now, and as for payment, you can cross that bridge when you come to it.

When a Dollar Doesn’t Equal a Dollar

The human mind is an amazing combination of smart and stupid—or, more accurately, rational and irrational. One example of this is the way our minds treat our money differently depending on whether this money is in the form of cash or a credit card.

Numerous studies have shown that when people buy things with credit cards, they spend significantly more money than when they buy things for cash. Handing a clerk a credit card just doesn’t feel as much like spending money as handing the same clerk some real cash. A $20 charge doesn’t feel as expensive as handing that clerk a $20 bill. But it is.

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Psychologically, the difference between cash and credit can be quite large. In one study, tickets to a Boston Celtics game were auctioned off. Half the bidders were told they would need to pay cash for their tickets on the following day, and half were told that payment would be made by credit card. The credit card bids were twice as much as the cash bids!

Optimism and Realism

Credit cards, and credit in general, are based on optimism. The idea is that we can surge ahead and make assertive moves to start businesses, invest in projects, and improve our lives without having to accumulate all the necessary resources before beginning to move forward. Our entire economy is based on this faith in the future. And so are the lives of most people in this economy.

No one wants to live in a little apartment for 30 years, while they gradually accumulate enough money to pay cash for a house; it makes much more sense to get a 30-year mortgage. No one wants to take a bus to work for 5 years while they save enough money to pay cash for a car; it makes much more sense to buy a car with monthly payments we can afford.

Optimism is a good thing—except when it’s unrealistic. When optimism causes us to buy things we can’t afford, it turns a corner from a good thing to a bad thing. The problem with credit cards is that they seduce us into turning this corner.

Present and Future

Credit cards are alluring because they create a separation between the present and the future. We can have our fun now, and pay the piper later.

In the moment, the card makes us feel rich and powerful—we can make purchases up to the credit limit, which is a lot of money. Maybe there’s a vague thought that we might win the lottery, inherit money, or get an unexpected raise at work, in which case everything will work out. Spending money with credit cards is so easy and pleasant that it’s natural to turn our minds away from the troubling question of how we’re going to pay for all this when the future finally arrives, in the form of a bill.

The darned thing is that the future always does arrive. The more we ignore this reality, the harder it hits us when it comes. Taking a deep breath and facing up to things in a strong way is the key to building a positive future.

Cash Keeps Us Smart

Of course credit cards make sense for buying things on the Internet and renting cars when out of town. But if you’re trying to right-size your everyday spending, credit cards are about as helpful as a good, stiff drink before you take a test; you might feel better, but you’ll do worse. The smart move is a shift to cash when going out to eat, shopping for food, and going to the mall.

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I remember the downcast look on my client Lisa’s face when I presented this suggestion. She said credit cards made her shopping experiences more carefree and fun. That’s when I knew I had made the right suggestion. Credit cards affected Lisa the way they affect many people, by creating an illusion that we’re buying real goods with money that isn’t quite real.

I tried to offer input that was tough-minded and realistic but positive at the same time. I said that when you take cash out of your wallet, you are using money you have earned and saved to buy something that will enhance your life, rather than spending money you haven’t earned yet. Once you’ve paid for something with cash, you are free and clear, with no need to turn your eyes away from a future that makes you nervous. If you spend less than you would with plastic, this will keep you within your budget. Buying things with cash might feel tough and hard, but it is clean, straight and solid as part of a foundation for a better future.