You decide that you want to buy a new television. After doing your research, you go to the local store, hand over your credit card, and come home with a shiny new HDTV. That’s relatively painless.
Now, consider the same situation, but change the method of payment. Before going to the store, you go to your bank and withdraw the necessary cash. You watch as the teller counts out several hundred dollars in $20 bills. With a plump envelope in your jacket pocket, you go to the same electronics store and buy the same TV. Now, you watch as the cashier carefully counts out that wad of cash. Somehow, this purchase is more difficult. This phenomenon is known as the “pain of paying.”
Credit Cards Delay the Pain
From a strictly objective point of view, the two transactions described above are roughly the same. You spent the same amount of money and ended up with the same product. However, the cash transaction may feel more difficult, because the payment feels much more “real” when the physical cash is being transferred.
If you detach yourself from the situation, you’ll realize that credit cards are not evil. From an emotional standpoint, though, they do make a difference. This is because credit cards are able to offer you that instant gratification (a new TV), while delaying the pain of paying. You don’t have to pay for the TV until your credit card bill comes at the end of the month. There is more of a detachment between the purchase transaction and the payment transaction.
The Human Factor
As human beings, we have a somewhat twisted perception when it comes to money and payment. With a credit card, you get the benefit of a delayed payment, plus the possibility of bonus rewards and built-in record-keeping. However, for people who struggle to maintain a budget, a credit card can be a challenging temptation that leads down a rather unfortunate road.
A popular piece of advice given to people struggling with debt is to switch to a cash-only existence. This magnifies the pain of paying on every transaction, hopefully reminding this person that with every latte, every indulgence, and every bill, money is changing hands in a very real way. You start to recognize the opportunity cost of the situation.
Taking it even further, you can divide up your monthly budget into cash jars. Each jar represents a certain category of expenses, like food or transportation. When you need money for lunch, you take the cash out of the food jar. This is a technique that Gail Vaz-Oxlade
Making More Money Doesn’t Solve the Problem
If I have budget issues, all I have to do is make more money, right? That way, I can cover my expenses and have some play money to spare? Unfortunately, going back to the human element, that doesn’t really work. More often than not, when you make more money, you tend to spend more money too. If you mismanaged an income of $30,000, you’re likely going to mismanage an income of $300,000 too.
We once came from a society where each family unit was self-sufficient. Then, we moved to a bartering society, where one good with directly traded for another. That made the opportunity cost real; by getting that one goat, I directly lost three chickens. Then, the advent of cash made these transactions easier, since money could work as a medium with which to trade with anything and with anyone. But it made money more abstract. By intensifying the pain of paying and returning to a barter-style mentality, money can start to feel real again.
Check out the video below from Big Think, one of my new favorite YouTube channels. They’ve got Michio Kaku talking physics, Penn Jilette talking atheism, Ricky Gervais talking comedy and, in this case, Professor of Behavioral Economics Dan Ariely talking money.
“Credit cards are not evil”, try telling that to new dad Ray Ebersole.
Ray posted a comment on that original post already. 🙂 We’re agreeing to disagree.
Very much so 😉 We can disagree and still be friends. Credit cards are like Las Vegas to gamblers, ADDICTIVE. Credit Card companies know that and target people that are willing to spend and not pay it off monthly. They win a majority of the time, same as Vegas odds favor the house.
Nothing that anyone can say to me will change my mind to the fact that “credit cards are evil” and really should be made illegal. I have no problem with debit cards because you have funds limited by what you have in the bank. You know you can’t spend more than you have, but with credit you know you don’t have to pay it back right away, so you will spend more than you have thinking that you will have it in the future.
It’s all in the way you look at it. I would rather pay what I know I have, then leave myself with the opportunity to not pay the balance and let it slide. Too much temptation, too much opportunity to get addicted to spending without as you put it “Pain”.
Pain is good for the soul and teaches good spending habits.