Credit, debit, and the tiny bit of irrationality of using plastic cards.

Slate magazine is running an interesting story on how credit cards are being forced to change their practices, and how such changes are forcing new lifestyle choices on people who in the past have been too quick to use such cards. From the article, here's a nice observation and thought experiment:

"Writing a check or deducting the price of a pair of shoes directly from your bank account packs a much more potent emotional punch than charging the pair of Allen Edmonds loafers on your American Express platinum card. Chalk it up to a concept called "the pain of paying," said Dan Ariely, the author of Predictably Irrational. (It's a concept the parents of his students at Duke University feel every semester.) Imagine that a restaurant, rather than charging $30 per meal, charged 50 cents per bite, with a waiter standing tableside collecting after each chomp. That would be an extremely unpleasant meal. But credit puts a safe distance between the ecstasy of consumption and the agony of payment, and thus makes us feel better."[1]

Recent surveys show that thirty-five percent of people carry a balance on their cards, and fifteen percent of people with credit cards said they have experienced at least “some” difficulty making the minimum payments.[2] I would speculate that, as gas climbs, this number also climbs, and probably proportionally. The whole psychology of personal credit card use is interesting, and there's been a lot of research on just how people use them -- not in the least because of how credit companies want to maximize their profit margin off of fees. For instance, some research shows that 35% of people who owe money on their card (all the while paying interest) also save "because it makes them 'feel better'."[4] Of course, that doesn't make a lot of sense, since return on savings rates are going to be WAY lower than any interest penalties for carrying a balance. But habits of spending and rationalizing money usage are anything but easy to self-monitor.

I admit to catching certain odd habits in myself. I run virtually all of my spending through credit cards, but I pay them off every month, using them something like debit cards, but with the added protection that comes with credit cards. Still, there are some malfunctions of the apparatus (i.e. I don't think rationally) when I look over my spending.

For example, it became too easy and pleasurable to drive through Starbucks every morning and pay $4.17 (or so) for a drink. That's a lot of money over the month, as I'd learn to my chagrin on each monthly statement. I've read a bit about addictions, and I knew quitting cold turkey probably wouldn't work. So my first deflection was simply to drive through McDonalds instead, and buy their cheaper coffee, which, fortunately, I found to be surprisingly good. But that was still around $1.68, plus the added cost of the gas for diversion and for idling in line. Making it at home would have been most cost effective, but I have to match the quality of "retail" coffee. Thus, my next deflection would work far better.

Was there any other drink that I liked equally well? I happened to be in a Walgreens store, and they sell Arizona Green Tea's in a big bottle, all jazzed up with Honey. But they were selling cases of them, and the unit cost of each bottle in the case was well under a dollar. I bought a couple of cases, stuck them out in the garage 'fridge, and now live happily ever after on the morning grab-n-go routine. Furthermore, I get to experience the new-found pleasure of not seeing a spreadsheet-like column of Starbucks or McDonalds rows snaking down my card statement.

Using plastic as the default mode for purchasing -- whether as credit or even merely as debit -- probably introduces all sorts of psychological pitfalls that carrying around cash would allow me to avoid. This might be the real power behind Dave Ramsey's system, a well-received popularizer of financial planing. He writes, "I found out that Grandma's way to handle money still works. People used to always use cash envelopes to control their monthly spending, but very few do in today's card swiping culture."[3] One can see that this is not much different than the waiter scenario above, for one gets to see the chomp taken out of the money at each envelope draw. As a psychological matter, swiping is fast, easy, and very UN-distracting; hence, it's just as fast and easy to loose track of the item-by-item cumulative damage to the wallet. But as far as credit card companies are concerned, isn't that the whole point?

REFERENCES

[1] "The Death of the Credit Card Economy" Slate August 30, 2008 (Accessed September 1, 2008)

[2] Humberto Cruz "Credit card debt is still a plague" Kansas City.com (Accessed September 1, 2008)

[3] "Dave Ramsey's Envelope System" Dave Ramsey Website (Accessed September 1, 2008)

[4] Nic Cicutti "Jekyll and Hyde savers" Moneysupermarket.com (Accessed September 1, 2008)


O.