Credit card spending produces affect the overall Savings and economy . Particularly in an economy where consumers tend to rely on credit cards for necessities. The persons who posses credit card spends unnecessary while shopping. Average over spending per credit card holder is 20 to 30 percent as he does not have to pay while purchasing and it accumulates in billing cycle. It causes towards less saving and increased spend. There are many types of Credit Cards.
There are Good and Worst Sides of Using credit cards. First we look at good side:
- Cost efficient way to get what you want, when you want: Let’s say that you want to buy a Laptop. the model you want is 50,000/-, but you don’t have the cash to pay for it. You can buy it without waiting for money to be saved or does not need to borrow from nears and dears. You can pay using credit card and walk out of the store with the Laptop. All you have to do is pay the bill in a some number of months, and credit cards become a cost efficient way to get what you want, when you want it.
- Safe and convenient. Shopping for expensive items with cash is risky. Lose your wallet and those TV funds are gone for good. Credit cards are an easy and safe way to shop. You can also use a debit card, but combine the delayed-payment option with the security and convenience of plastic, and charging can make a lot of sense.
- Rewards. Credit cards have rewards programs. You can earn points redeemable for cash or goods. If you charge regularly and pay the balance in full each month, you can come out ahead. Keep charging correctly and you’ll be flying home for the weekend with no debt and on your creditor’s dime.
- Consumer protection. Now assume you got a bum Laptop from an Easy Computers. When you return it, merchant denied to exchange the bum laptop . If you have paid by credit card, you’d breathe a sigh of relief since credit card purchases are protected by consumer friendly laws. After attempting to resolve the problem with the retailer, you could file dispute form for credit card charge and possibly not have to pay.
Credit cards accelerates people to spend money they might otherwise be unable to spend. This can increase a persons spends and in last it causes effect on saving. Everyone is living a higher standard than they can afford. This encourages others to attempt to keep up with this spending rate.
- Pushing to overcharge. One Study found that having a credit card, even one with a high balance, encourages more spending, even among people with high self-control.An open source of credit can be dangerous. While you’re in the store looking at Laptop, you may also buy Mobile. Just having the ability to spend more than you can afford. Repay makes it easy to get in over your head. Super control is necessary to avoid such circumstances.
- High interest and fees. You may plan to pay the Laptop off in three months, but life has a way of getting in the way of good intentions. So you make the minimum requested payments. If you skip a cycle or two. In that case, interest and fees would be charged on to the balance. It turns into costly debt. The only way to keep the cost of credit low is to pay balances in full and on time.
- The high, Additional cost of mistakes. It’s bad enough to be charged a 300 Rs late fee for missing a payment, but the delinquency also tag up on your credit report. This delinquency – black mark will spoil your credit report.
Saving money is an important for financial freedom and protecting in emergencies. But credit card debt decreases the ability of individuals to save in two ways.
- They may be unable to save because they’re paying Higher interest rates on credit cards.
- Insist it for unnecessary Shopping, Decreases savings means less Saving.
Why We Spend More When We Pay With Credit Cards
A couple of months ago, I decided to went out for shopping of clothes. Afternoon I went to my favorite shopping destination. Even though I usually have very tight controls on the items to be purchased, that I may bring into the house, I generally let myself buy Four to Five pairs of Suit’s a year.
It wasn’t until I arrived at my personal wonderland that I realized I had forgotten to bring the required amount of money. I had planned to spend on this expedition. No matter, I thought. I would just charge my pairs extravagantly and pay the credit card back out of the cash. It probably will come as no surprise to learn that I left the store with 7500/- worth of 4 Pairs rather than the 5000/- I’d planned. Clearly, I’m not to be trusted with a credit card in a Clothes Store. While overspending by 2500/- is not a big deal if it only happens once in a while, it can definitely be part of a pattern — a predictable pattern of overspending with credit that can happen to the best of us.
We Focus on the Benefits of Items Bought on Credit, Not the Costs
Consumers using credit cards gives more attention to the benefits of the product they are buying, ignoring the costs. Because the pain of purchasing the product has been overruled from its benefits, consumers are more likely to weigh those benefits, without considering the price.
For example, suppose you had Rs.1000/- in cash to spend on a dinner out with your spouse. While the surf and turf sounds delicious, you don’t want to be embarrassed when the check comes and your Thousand doesn’t cover the meal, let alone the tip. So you order from the right side of the menu and end up with a safely inexpensive pasta dish.
If, on the other hand, your plan is to pay for dinner with credit card, then you have much less reason to worry about how much the cost. And that means you’re more likely to think about any particular dish. A check arriving for double what you planned to spend can be ignored off if you can pay for it easily with credit.
On its cost-benefit analysis — can be very difficult to do when you have already decided to pay for something with credit. This is what happened to us when I spent 1.5 times what I planned for clothes. Because I knew I had a credit card, I didn’t even bother to look at how much each pair cost, and instead just thought about how much I wanted to buy.
Combating the Effect of Credit on Your Brain
These psychological quirks are of course why so many personal finance experts recommend that you spend only cash on your purchases. Paying in cash will always keep the pain of paying immediate in your mind — and make it impossible for you to think only about the benefits without considering costs.
But not everyone is able or willing to switch to a cash-only life. For regular credit card users, it might be possible to tie the pain of payment to the enjoyment of purchases by writing down the cost of any particular purchase. This might be especially helpful if the record is a running tally of your credit card charges for the month, meaning you are consistently forcing yourself to see what your entire credit card payment will be at the end of the month. That act of writing down how much each transaction costs could help you keep the price in mind even if you won’t actually “pay” until your statement arrives at the end of the month.
Unfortunately, this can be extremely difficult to put into practice. It would require diligence to carry your monthly tally around with you. Force yourself to add to the tally every time you pay with plastic. Overall, if you want to force yourself to be mindful of costs and feel the pain of payment, it is much easier to simply carry cash.