Psychology of Credit Card Spending: Understanding Overspending and Strategies to Stop It

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Credit cards can be a double-edged sword, offering great benefits to those who use them responsibly, such as earning reward points, airmiles, and hotel points, while also posing a serious risk to those who do not use them correctly. If used irresponsibly, credit cards can ruin you financially and mentally.

While many people might identify overspending as the main disadvantage of credit cards, I believe this is a psychological issue that stems from human nature rather than a problem with the credit card itself.

Here’s why:

When you apply for a credit card, your bank gives you a pre-fixed credit limit. When you make a purchase at a store or online using your credit card, you might feel like you are not spending your own money because you are using the bank’s funds. Since cash isn’t coming out of your bank account or pocket immediately, your mind might tell you that you have more money to spend than you actually do. This type of thinking can lead to overspending and a false sense of financial security.

Credit cards can be an amazing financial product when used responsibly. However, it’s important to acknowledge that there are some potential disadvantages to using a credit card. These include high interest rates, hidden fees, and the temptation to overspend.

Despite these potential drawbacks, many people find that credit cards are a valuable tool for managing their finances. In fact, some individuals even have multiple credit cards that they use on a regular basis. For example, personally, I have 51 active credit cards but never overspend. For me, managing multiple credit cards is an art. It doesn’t require rocket science-level knowledge, just adherence to a few straightforward principles.

So, how do you stop yourself from overspending?

Just by following a simple rule: using the credit card as a debit card.

To use a credit card as a debit card without compromising any benefits that a credit card offers, you’ll need to create a separate bank account to manage your credit card expenses. This can help you stay organized and ensure that you’re able to keep track of your spending. For example, let’s say that you have Bank A as your primary bank account and Bank B as your credit card expense management account.

Whenever you use your credit card to make a purchase or pay a bill, transfer the same amount from your Bank A account to your Bank B account. For instance, if you need to make a bill payment of Rs. 10,000 using your credit card, immediately transfer Rs. 10,000 from Bank A to Bank B. Repeat this process for all your spending, and at the end of the month, after your credit card bill has been generated, pay the total amount due from your Bank B account.

By using your credit card in this way, you can enjoy all the benefits of credit cards without worrying about overspending or getting into debt. Furthermore, you have the option to invest the balance in your Bank B account into short-term savings instruments such as fixed deposits (FDs) or liquid funds to earn interest, but it’s highly recommended that you avoid investing this fund in equity. Alternatively, you can simply keep the balance in your savings account and earn interest on it. It may be worth considering a bank account that offers a higher interest rate for your credit card expense management account. This can help you maximize your savings and earn more money on your funds.

What if you are unable to pay your credit card bill in full due to an unforeseen emergency?

In such a situation, it is advisable to pay the maximum amount you can and convert the remaining balance into an Equated Monthly Installment (EMI). Credit card companies typically charge 40 to 50 percent annual interest on the outstanding amount, but if you opt for EMI, the bank will usually charge only 10 to 18 percent annual interest on it.

Of course, it’s important to remember that using a credit card responsibly requires discipline and self-control. You’ll need to be mindful of your spending habits and make sure that you’re able to pay off your balance in full each month. By doing so, you can reap the rewards of credit cards without falling into debt or financial trouble.

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  1. Yes. I follow exactly the same way. I maintain two accounts so that the total turnover thing in one particular bank is reduced. (I have other reasons for that)

  2. I use a different technique which works well for me. So, I pay all my credit card bill in real time, e. g., if I spend Rs. 1000 in book myshow from AU Zenith credit card to get the offer, I will pay the bill then and there.
    For my main cards, Diners Black and Axis Magnus, I have set up an autopay via net banking so that I don’t miss any payments.


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