Credit Cards–Startling Psychology & Why You Need to Cut Them Out

Ever since I was a little girl, there was one word that fascinated me more than any other–the word “why”! I constantly asked why, either to others or just to myself. I always wanted to know not only how things worked, but why that was the way they worked.

Why are credit cards dangerous?

Credit cards can be the cunning and dangerous gateway to your financial demise if you’re not careful. If you’re in the early stages of budgeting and getting your finances together, these facts are going to be crucial for you to learn and take into consideration.

By the way, if you haven’t checked out my FREE Budgeting Worksheet yet, click here!

Coupled with this post, you may find that you are spending much more than you thought or intended… simply from using credit cards! I know I did.

Without further ado, let’s get started!

1. Credit Cards vs. Cash

Have you ever walked into a store needing one thing and walked out with 10? I know I have.

It’s very easy to do!…. Well, if you’re using a credit card, anyway!

If you have 10 dollars in cash and go in the store to buy a gallon of milk and a loaf of bread, you probably won’t walk out with more than that…

With a credit card, there is no set amount of money in your pocket when you walk in the store. This makes it very easy to spend more than intended at check-out!

Carey Morewedge and team led some experiments that may suggest that credit limits may entice greater spending. “For example, a $1 candy bar may seem less expensive when compared to $5,000 in available credit than when compared to the $5 bill in one’s wallet.” (Read the full article here)

In another study done by two MIT students in 2001, it was found that shoppers who use credit cards to pay could spend up to 100% more than if they used cash! (Read the full article here)

This is my first reason that it may be time to lock up the credit cards for a while as you learn to budget your money!

2. Credit Cards have High Interest

With the above facts in mind, it follows that it would be very easy to rack up some charges on that card!

I don’t know about you, but I rarely read the small print…

It’s pretty important to know what the small print is with credit cards, though. Depending on your credit history, you could be getting charged up to 30% APR interest!

That’s insane…

If there is $1,000 on my card at the end of the month at a 30% APR (Annual Percentage Rate), that’s a $25 fee added onto my balance.

Oh, and they don’t continue charging the interest based on your original balance… So don’t think your annual fee for borrowing money will be a flat $300!

Every interest fee they tack on goes into your balance.

So, next month, if I still haven’t paid it off, they will add $25.63 onto my $1,025 balance.

Following this math, in one year, the total balance would be $1,312.11.

You can see how dangerous this can be, even to hold a relatively small balance!

Maybe your interest rate isn’t 30% (this is very high). Perhaps it’s closer to the median, at 15%. That’s still over $150 dollars in interest per year, for holding a balance of $1,000!

Tread carefully when applying for credit cards, if you are going to use them. Make sure you’re reading the important fine print, such as the APR, their policies on late fees and grace periods, and any annual fees they charge to even own the card—whether you use it or not!

3. Credit Score

Do you know what your credit score is? Do you know how to check it?

Credit scores are vital in the world we live in today.

Lenders look at your credit score to determine how reliable you are and if you can be trusted with their money.

Will you pay it back? Will you pay it back on time?

Below 500 is considered poor.  500-600 is fair, 600-700 is considered good, and above 700 is considered a very good score. If you’re above 800, you’re practically invincible! 😉

So what determines your credit score?

There are lots of factors that help decide where you land on the scale.

(You can check out a detailed report of your credit score for free on www.creditkarma.com . They use reports from Equifax and TransUnion, two of the biggest credit reporting bureaus.)

These factors include:
  1. Credit history
  2. Payment history
  3. Debt to credit ratio
  4. Hard credit inquiries
  5. Number of accounts/types of accounts

Debt from credit cards can take a long time to pay off (due to interest), but paying off this debt is arguably the best way to raise your credit score.

Also, important side note—don’t close your credit card accounts without doing thorough research!

I am currently working on a post on credit scores that will give a more detailed explanation of the above factors, why you shouldn’t close out your accounts just yet, and how to make your credit score better!

Important: The reason I’ve added credit score into this post is because continuing to add onto your pre-existing balance will only lower your score, impacting your borrowing power in the future.

Putting the credit card away for a while may not increase your credit score (or it may!).

However, it will at least put it in neutral (as long as you’re continuing to make monthly payments) as you learn to budget your money effectively.

Once you learn how to budget, you can begin to make a plan to pay off your debt.

If you haven’t checked out my FREE Budgeting Worksheet yet, find it here!

These three general topics are a great start to cutting out credit card usage. Next is the more individual practicality.

How can you apply these powerful facts about credit cards to your own life, and what does this application look like?

4. Budgeting

When you decide to stop using credit cards, you’re probably going to start seeing yourself paying a lot more attention to how much you’re spending!

It’s a lot harder seeing cash leave your hand.

There is actually psychology behind this as well.

(I need a little help here; if you know where to find the article, please let me know! I want to cite proper sources!)

Basically, it goes back to our more primitive days. Back when humans bartered for goods, we traded ONE thing for ANOTHER.

Paying with cash has this effect. You hand the cashier the money, it goes into a drawer, and you get the goods you purchased. Even swap.

When you use a credit card, you hand the card to the cashier to swipe, they hand you your bag, and then hand you your credit card back!

Logically, of course, you know you just spent money for what you received.

But in the survivalist part of your brain, you gave nothing for what you received, because you got it right back!

This is important to remember, and is possibly linked to the above studies showing that people can spend up to 100% more using a credit card vs cash!

Cutting out credit cards will help you budget your money better.

When you walk in a store with $50 in cash, that’s it. You know you can’t spend more than that, so you are sure you keep your items below the dollar amount.

If you are disciplined, you can use your credit card as a debit card.

That is, you can budget out your money on paper, know that you only have $50 dollars to spend on this shopping trip, and only spend that amount, paying it off at the end of each month.

This takes A LOT of discipline!

If you are new to this, or aren’t sure if you can achieve this yet, I recommend just storing the credit cards and sticking to cash while you make sticking to your budget a habit.

Don’t try to learn too many new things at once!

Gaining control over your finances can be overwhelming at first.

Take baby steps!

5. Instant Gratification

Credit cards can cause us to make a bad habit out of instant gratification.

The internet is an expert in knowing much of an instant consumerism mindset we have. We live in the age of the immediate!

Question? Get an immediate answer from Google!

Forgot something but don’t have time to go out again? Get it within 2 hours with Prime Now!

Amazon is especially attuned to this—they have a button called “one-click buy” that ensures you get exactly what you want with one click!

We love easy, fast, and efficient.

But…

This can be your downfall when trying to get control of your finances.

I live by this rule: if there is something I think I want or need, I wait 30 days.

If I still want or need it at the end of a month, I will buy it. I’ve done this since I was just 10 years old. It’s worked out pretty well for me, I know I’ve saved a lot of money!

Now, don’t get me wrong… I haven’t always stayed true to my rule! (I got in debt partially by NOT living by this rule!)

Once you try this rule for a month or two, you will start to see how much you really don’t need! And watching those savings pile up is very satisfying!

That leads us to our last point:

6. Need vs. Want.

What really determines a need or a want?

We could go into the psychology of this (Maslow’s hierarchy of needs, anyone?)…

But ultimately, when it comes to your life and finances, you’ve got to take a hard honest look at what you truly need vs. what you want.

This can be difficult!

What I have done in the past if I’m not sure about whether I need something, or it’s just a want, is put it away for a month and see how much I truly miss it. (I once did this with makeup, and it was one of the most eye-opening things I ever did!)

No one can decide your needs for you. Your needs vs. your wants are totally up to you.

Conclusion

Hopefully this post has been eye opening for you!

I wanted to write about this because a lot of people (especially young people) don’t think much about the facts and consequences of using credit cards.

What has been your experience using credit cards?

Has anyone taught you how to use them? Do you feel as though they are necessary in your life?

Bonus Question! Would you be willing to give them up for a short period of time to see how it impacts your budgeting month to month?

I’d love to hear from you!

Leave a comment below or shoot me an email here! 🙂

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