Credit card companies are professionals at getting you to open your wallet. Here’s how to fight back.
Credit cards aren’t necessarily a bad thing, but they can too often feel like weapons of financial destruction for some people.
The problem is that shopping is so much fun and the card companies certainly don’t make it any easier with all kinds of psychological tricks to have you pulling out the plastic. Recently, we shared a few ways that credit cards get you to charge your life into oblivion with discounts on your first purchase and rewards points.
To help you avoid more of this plastic money mischief card companies pull, I want to share three more ways credit cards get you to overspend and how to keep your credit strong.
3 Ways You Can Be Tricked into Credit Card Overspending
Credit Cards are Not the Same as Cash
Studies have shown that our brain reacts differently when we pay with cash versus credit cards. People actually experience something that can be interpreted as pain when paying with cash. It’s imperceptible most of the time but it’s there.
Ever cringe when you see the price tag for something?
Paying with plastic doesn’t trigger that same physical response. That makes it easier to charge away.
We also do a kind of mental budgeting when paying with cash. You have a good idea of how much cash you have in your pocket or in savings most of the time. When you pay for something with cash, even if it’s at a subconscious level, you take that money out of what you have available.
Again, it’s not the same with credit. Even though people have a limit to which they can charge, they’re much less likely to do this kind of mental budgeting when paying with credit.
That’s why it’s important to think about the true cost of buying something with credit. You can use loan payoff calculators to find the amount of interest the purchase will cost and you can even visualize making the payment to your credit card company.
The More You Spend, the More You EARN!
Rewards systems are the ultimate in charge card chicanery. The idea that you are earning money by spending it is complete non-sense!
Some credit cards even have tiered systems where you earn a higher cash back rate when you spend more.
Of course, you can theoretically benefit from these programs if you pay your balance every month, but the card companies know that the vast majority of people won’t do this consistently.
Cards with rewards programs often carry some of the highest rates and charge annual fees. If you’re not paying your balance consistently, those fees and charges will soon grow to more than that 2 percent you’re “earning.”
Congrats, You’ve Earned a Limit Increase
Ever get a limit increase out of nowhere? Of course you have, everyone has.
Credit card companies know that people think of their limit as available cash and many will regularly spend up to that amount. They can’t just give everyone a million-dollar limit, but they are going to push your limit as high as they can without worrying about credit risk.
Getting a limit increase isn’t all bad. It improves your credit utilization ratios which can actually increase your credit score. But none of that matters if you chronically overspend and pay hundreds in interest charges monthly.
Why is it Important to Manage Your Credit Card Spending?
The reason you need to watch these credit card tricks isn’t just to save your money but to save your credit score as well.
I destroyed my credit in 2008, partly from running up $23,000 in credit card charges. I didn’t know why bad credit is so bad so I didn’t really mind that my credit score was catastrophic.
For example, did you know that insurance companies can charge people with bad credit more for their premiums? It’s called credit-based insurance and people with bad credit pay premiums as high as twice as much compared to good credit policy-holders.
Potential employers and landlords can also look at your credit report in deciding to give you a job or rent you their place.
Knowing these tricks credit cards use to get you spending is a big part of stopping yourself from the behavior. It doesn’t mean you have to avoid credit but learning how to use it responsibly will keep you from the biggest traps.