‘Tis the season to beware!

‘Tis the season to beware!

It all started when I got an SMS from my credit card provider informing me of a transaction that had taken place and that I still had R19000 as my “available balance”. R19000, mmm, that sounded good, at least until I remembered that my total credit limit is R20000 and that I did not have R19000k “available” to spend. In fact, I owed them R1000! It is insidious and I am going to sound like a conspiracy theorist now but we need to realise that the whole system is designed and structured to get us to spend more and to spend more without thinking about it.

 

Research done by Dun and Bradstreet shows that on average people will spend 12-18%* more when swiping with a credit card than when paying cash. And when McDonalds’ introduced their credit card they found that the average spend went up from $4.70 to $7.00 per transaction – that’s almost 50% more as a result of their credit card. In fact, there is a general expectation by retailers that when they introduce a credit card, the average spend will increase as a result.

 

The reasons for this are numerous and well researched but in short there is little (if any) emotional attachment to a plastic (card) purchase. We view it as if we are spending someone else’s money and as a result we don’t feel any “pain” when swiping. The result is we tend to spend more than we would when paying with cash. When you use cash you usually think about it twice –it means going to the hassle of drawing the funds and then counting out the actual paper (and you cant spend what you don’t have). The research shows that “the more transparent the payment outflow, the greater the aversion to spending, or higher the ‘pain of paying’. Cash is viewed as the most transparent form of payment.” Cash therefore discourages spending.

When we use our credit cards it is too easy to spend without thinking about it. It is also easier to do “impulse” and unplanned shopping with a credit card. Think about this – you pop past the “store” on the way home to get milk and bread…you don’t have cash and you need to use your credit card…something is ingrained in us that says you cant just put this on your card and so you get a chocolate and maybe a magazine or 2…you’ve just spent more…on stuff you had not planned to buy and probably did not need either. Or think about the last time you went grocery shopping and paid by card – chances are you just signed and walked out…only later did you think about the amount and chances are you could not remember it either…if you had to draw cash and then pay a few thousand in notes for groceries you would give it much more thought and would probably know exactly what you spend…no wonder we would spend less if we used cash only.

 

But surely it is not safe to carry large amounts of cash? While this might be true, these days with the significant amount of card fraud around, it is also not 100% safe to use your card either.

 

But what about the rewards programs?

My sense is that if you can offer me a reward then the chances are that you are over-charging me upfront in some way or another. The rewards programs are also not nearly as rewarding as we think they are…I don’t have SA stats but in the US it is estimated that up to 75% of air mile rewards go unclaimed – I suspect this may be the case when it comes to credit card rewards too. I know that I think differently about spending my “miles” than I do about swiping my card (this is not rational).

 

And the rewards are not that great either – the amount of money you need to spend to earn 1 “reward rand” is more than we realise. With my credit card company, I get 1 mile for every R12 spent. So 1000 miles means that you spent R12000 and with 1000 miles you can buy goods for R100. By my calculations, I spend R12000 to get R100 back! That’s just plain crazy (and there is the annual reward program annual fee in addition to this).

 

Figures at end Dec 2012 showed that there are just over 20milllion credit active consumers in SA and almost 50% of them were credit impaired (3 or more months in arrears with their payments). The most recent figures released this week are slightly worse. At one stage in 2012, one of the “big” unsecured lenders was rumoured to be writing over R400m worth of new loans each month. We need to wake up to the fact that we have a debt crisis in SA and credit card debt is part of this. We seem to have the notion that we can just keep on getting more credit and spending more as a result but the truth is we can’t spend your way out of debt (which is exactly what the debt companies want us to believe we can do). Somewhere along the line we are going to pay for all the “credit”.

 

Having said all of this, I accept that credit cards are not all bad but we need to recognise that they are designed to get us to spend more than we would. On top of this most of us also end up paying interest on this bigger amount. If you want to use a credit card then you should consider the following:

  • Plan your spending – you will spend more on a card than if you paid cash – be aware of this and don’t impulse shop! I read a great quote that said a budget is people telling their money where to go instead of wondering where it went. Credit cards often leave us wondering about where the money went.
  • Never draw cash from your credit card – you pay interest straight away.
  • Always pay your balance in full on or before due date to avoid paying interest. If you don’t, you pay interest on the full amount from day 1!
  • A debit card is probably better than a credit in many ways and offers similar benefits to a credit card but without the interest penalties.

 

References:

*Dun and Bradstreet

**The September 2008 issue of the Journal of Experimental Psychology

***Prov 22:7