The psychology of overspending with credit cards

On Behalf of | Oct 11, 2021 | Credit Card Debt, Personal Bankruptcy

Credit cards offer several benefits to consumers. For one, the possibility of purchasing large-ticket items that one cannot afford in the present and paying it off in future installments. Many banks also offer cashback incentives that appeal to cardholders.

However, credit also has downsides. One downside is that credit card users tend to overspend much more than people do when shopping with cash, debit or checks. The psychology of overspending offers valuable insight into why credit cards can prompt shoppers to spend much more than they should.

What makes credit card users overspend?

Several studies, including ones from the Massachusetts Institute of Technology and the Federal Reserve Bank, demonstrate that people tend to overspend more when using credit cards. Why? There are several hypotheses:

  • The minimum payment problem

Credit cards allow cardholders to repay a purchase in smaller installments. This can make it seem as if a purchase has less of an effect on your bank account than it actually does. And with interest, an item bought with a credit card costs you more than if you had used cash.

  • The physical nature of cash

When paying with cash, you see a tangible result of paying too much. The cash in your wallet, pocket or purse dwindles, signaling to your brain that you should reign in your spending. Credit is an intangible concept that is easier to disregard when spending.

  • An easy mood-booster

Studies have linked shopping to elevated moods. Impulse-shopping can become a vicious cycle in which you buy something with a credit card to feel better, quickly feel depressed for spending money and use your credit card again to boost your spirits.

Credit cards do make it much more tempting to over-shop. By learning more about the motivation behind credit card overspending, though, you can go a long way toward avoiding it in the future.

Help is available for over-spenders

All humans are vulnerable to the intoxicating nature of credit cards. If you have found yourself in a tight financial spot due to credit card spending, you are not alone. There are options out there to help you reign in your spending and reduce your debt. Some consumers crack down and make a tight budget for themselves. Others find therapy helpful in coping with unhealthy spending habits. And every year, hundreds of thousands of Americans turn to bankruptcy as an option of wiping away their unsecured debts and starting over again.