Why Credit Cards Lead to Overspending (and What You Can do About It)

By Mike Peterson
In June 25, 2012

As someone who deals with debt for a living, I can’t tell you how many times I’ve heard people defend their credit card use.  “I only use my credit card for emergencies,” they tell me.  Or, “I just use it to get the airline miles/reward points/cash back.” And of course, one of my favorites:  “It’s okay because I know how to use it responsibly.”


Here’s the thing, though: It’s really, really hard to use credit responsibly.  Ever.  Sure, there are the (very) rare cases where people use their cards and pay their balances off – in full – every month.  But in most cases occasional, “responsible” credit card use quickly gives way to overspending and using credit cards like they’re a secondary source of income – and as it turns out, there’s a growing body of scientific research that backs me up on that.


A recent study by MIT’s Sloan School of Management found that people who use credit cards are much more willing to overspend than people who don’t use credit cards.  According to the study, people who use credit cards instead of cash tended to make larger purchases at restaurants and department stores.  In fact, in one experiment, the MIT researchers found that people who were using credit cards to make a purchase were willing to spend up to 100 percent more than people who were using cash.


Yes, you read that right:  100 percent more!


I know, that sounds ridiculous – but think about it for a second.  Let’s say you’re shopping at your favorite clothing store.  You buy a new shirt (or a sweater or a pair of pants) and your total is $75.  The salesperson tells you that if you spend just $25 more, you’ll get a discount or a free gift.  Now, if you’re paying with cash and you only have, say, $80 to spend, you’re likely to turn down the offer.  But if you’re paying with a credit card, it’s a lot easier to run back and grab $25 worth of stuff you don’t need and didn’t plan to buy in the first place.  That $75 purchase just jumped up to $100 – and it’s easy to see how that purchase could jump up more.


And even if you avoid racking up interest by paying off your $100 credit card balance at the end of the month, you still spent $25 more than you would have if you’d paid cash.


Now imagine that every time you use your credit card, you spend $25 (or more!) extra.  Plus, you’re probably paying some sort of annual fee just to have the credit card in the first place.


See where I’m going with this?  This tendency to overspend is what leads so many otherwise responsible people to wind up with thousands of dollars in credit card debt.  And no amount of airline miles or cash-back rewards are going to compensate for that.


So, how do you avoid falling into the overspending trap?  Here are a few easy fixes:


  • Make a budget.  Stick to it.  If you have a sensible budget in place, you’re less likely to run into situations where you run out of cash and have to use credit cards.  Remember, a good budget should not only account for living expenses like rent/mortgage payments, groceries, and utilities – it should also leave you with a little money for fun things, too.  Don’t have a budget?  Check out my guide to the 50/30/20 budget or this beginners’ guide to budgeting from our recent news appearance.


  • Pay cash for everything.  Period.  When you go out shopping or to a restaurant, take a set amount of cash with you.  When it’s gone, it’s gone.  There’s no way to overspend when you don’t have money.  And while we’re on the subject of not having money . . .


  • Leave your credit card(s) at home.  You can’t use your credit card if you don’t have it.  Keep your credit cards at home in a safe place.  Don’t carry them in your wallet or purse.  Out of sight, out of mind, out of debt.


  • Do the math.  If the thought of free airline miles or the idea of getting cash back for every $XX you spend makes you reluctant to give up your credit cards, it might help to sit down and actually see what kind of “deal” you’re really getting.  Look at your credit card spending:  How much money did you spend to earn $50 or a few hundred air miles?  In most cases, you’ll find that to earn any type of reward, you have to overspend on your credit card.


So, what do you think?  Have you ever overspent on your credit card to get a “deal” or a “reward”?  How do you avoid using your credit cards?


Happy saving!

Mike is the author of “Reality Millionaire: Proven Tips to Retire Rich” and he has been published in a variety of local and national publications including Entrepreneur Magazine, Deseret Morning News, LDS Living Magazine, and Physicians Money Digest. He holds a B.S. in business administration from the University of Phoenix.

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