Credit Cards Threat To Financial Health

People probably heard of recent cyberattacks against JPMorgan Chase and several financial services companies. Though no one knows who was behind those attacks, people were alarmed and most possibly thought of adding security to their finances. For example, people may acquire security freeze on their credit files to prevent identity thieves from using their names to open new credit accounts.

On the other hand, two-factor authentication systems can be utilized during instances when strangers possibly got ahold one’s personal username and password. Moreover, people should avoid clicking links in emails that purport to be from well-known financial services companies. This is one of the current M.O. of online thieves who are phishing for people’s personal information.

The recent cyberattacks serve as reminder to people of the things that they must worry about. However, there are other more important things that they should also consider. People should really not be too worried about thieves; the greater is risk to their finances is no one but themselves. Unknowingly, with continued use of credit cards, people are continually diminishing their net worth.

Research have already shown that people who used credit cards are more apt to spend more money than those who prefer to use cash.

In 2001, a study showed that people are more willing to spend money when they use credit cards for their purchase instead of cash. This phenomenon is termed as “credit card premium.”

Another study in 2008 let people used gift cards that were denominated in dollars. Results showed that people were more prone to spending when using gift cards instead of when they have money on hand. On the other hand, one research in 2011 indicated that people who use credit cards paid more attention to product features, whereas those who used cash were more concerned with costs of products.

The observed behaviors proved to be only logical. When using credit cards, people feel less worried about paying since deadline for their balance is still a month away. Meanwhile, gift cards are used similarly with debit cards. Given the limits of their credit cards, people are more apt to buy things based on their features than their price. Studies have also shown that people tend to see more when they see card credit card logos.

Interestingly, people who conducted credit-card-related studies are also prone to favoring the use of credit cards though they already know its potential dangers. Credit card companies entice people by making them think that they are getting more miles with increased usage of their credit cards. In the people who succumb to the offers of such finance companies end up paying high interest rates.

Mr. Srivastava of Robert H. Smith School of Business at the University of Maryland conducted a study and discovered that he was also a victim dangerous credit card use. Using knowledge gained from his research, the started using debit card to better manage his expenses. Thus, the developed the habit of monitoring his finances and being careful not to exceed the limits of his credit card.

The same thing happened to Srivastava’s colleague, Priya Raghubir. She realized that she was greatly buried in debt though she was fully aware of the protocols employed when using credit cards. However, she changed her habits, and now she places greater control on her spending. Raghubir tried using cash, but she felt poor when not using credit cards. At present, she uses a new credit card with more rewards, and her son is also using information obtained through her research in managing his expenses.

Drazen Prelec notes that people should address their problem in rewards lust. However, he adds that he had his own struggles before. Previously, Prelec does not bite the frequent-flier miles that go with his cards. However, when he tried using his accumulated points, he could not leave his home anymore without his American Express card. Prelec uses his points for free travel. He also inhibits using debit cards for the same reason.

However, Prelec also regularly uses his debit card for various reasons. He Amex card is used for travels and for buying gifts. He monitors his expenses using results of his own research.

Zac Bissonnette believes that using credit cards for points is just indicator of people’s false perception regarding their own self-control. As analogy, he compared credit card uses who think that they can control themselves in spending to climate-change deniers.

Research should have helped people realize their need for controlled spending. However, recent data showed that growth in credit card spending is significantly higher than that of debit card. This results is possibly an outcome of loose credit standards.

Nowadays, people can now also pay with their phones. However, it would probably better if an app is developed to specifically remind people that they are on the verge of overspending.