Why do we spend more with credit cards? The hidden psychology behind it

Credit cards offer you great rewards and cashbacks through which you can maximise your savings and spend smartly. Credit cards make the payments on your behalf while you do not have to worry to spend cash until the due date of the billing cycle of the credit card. 

However, on one hand this might sound tempting, on the other hand if you do not spend your credit card with planning, you might form a habit of over spending which may disrupt your finances and even result in a debt trap. Let us understand the psychology of credit card spending and also discuss some possible ways through which you can control it: 

Psychology of credit card spending

The illusion of affordability: The credit card makes the payment on behalf of you which eliminates the process of cash being debited from your account immediately. This way you may not realise that you will be bound to repay the money sooner or later and end up spending more while saving real money in the bank temporarily. This creates an illusion of saving money and being affordable however, in reality it becomes completely opposite.

Rewards programs: Credit cards provide you with reward programs which include cashbacks, discounts, perks and loyalty points which you can earn each time you make a transaction from the card. Although these programs do sound attractive, this can become a major reason for overspending on your credit card limit. In order to earn reward points and achieve milestones, you might start spending on unnecessary things which you may regret later.

Impulsive spending: With credit cards, you are more likely to be a victim of impulse buying. With the convenience to pay with just a swipe or tap along with the marketing gimmicks including limited time offers can make you do impulsive buying while neglecting rational spending.

Social and emotional factors: Using a credit card can also become a social symbol sometimes. In order to satisfy ego and social comparison, people start spending recklessly to keep with the unrealistic lifestyle expectations.

Expert’s opinion

Ajay Lakhotia, Founder & CEO, StockGro, gave his expert insights and said, “As a result of impulsive spending, credit card defaults in India have risen. To overcome this, individuals must track spending habits, set practical credit limits, and distinguish essential expenses from indulgences. Taking a leaf out of the investing handbook that emphasises discipline, mindful credit card use protects financial futures. Better financial education will go a long way in ensuring credit cards are used responsibly to build credit scores, earn rewards, and navigate carefully in a cashless economy.”

Tips on how to control overspending on your credit card

Set a budget and stick to it: Combine your monthly budget with your credit card spending and set a spending limit on your card. This way you will be able to control your spending on the card and eliminate any possible overspending.

Use credit card only when necessary: Avoid using your credit card for small purchases like groceries and food joints. It is easy to swipe or tap your credit card, however, spending money immediately from your bank will help you be mindful of your transactions and possibly help you in avoiding frivolous spending.

Pay in full every month: In order to avoid any interest rates on your bills, it is advisable to avoid paying the minimum amount and instead pay your bills in full and enjoy interest free payments. This way you will stay well within your budget and not utilise your entire credit limit.

Avoid multiple credit cards: It is often problematic and financially risky to have more than one credit card. Hence, only keep one or two credit cards with rewards that you’ll actually utilise and which align with your lifestyle.

In conclusion, it is important to always analyse your financial situation and only then take any form of credit. This way you will not only avoid any burden on your finances but also will be able to utilise your credit cards rewards effectively.

Always ensure that you do not cross 30% of your credit utilisation ratio in order to maintain a healthy credit score. With this you can ensure that you get the best offers on your future borrowings when you really might be in need of financial assistance.

(Note: Using a credit card carries its own set of risks)