1. Feel the pain: Swiping a credit card causes less “pain” than physically parting with cash, according to a growing body of research. It might lead shoppers to buy on impulse or pay more than they otherwise would. Perhaps it is because we feel less connection to money if we haven’t touched it or because there is a time gap between swiping the plastic and paying off the credit card bill. Either way, be mindful of the tendency to spend differently when paying with plastic – and consider a cash-only diet if struggling.
2. Pay it off quickly, on time: Credit card debt can mount if not paid off quickly and fees can be added if payments are late. Interest rates are typically much higher than pre-arranged long-term loans and can compound exponentially if left unpaid.
3. Crunch the numbers: Likewise, paying off credit cards by only paying the minimum payment can end up with interest payments higher than the original bill. The Federal Reserve credit card calculator estimates a $2000 debt on a credit card with an annual interest rate of 20% would take 26 years to pay off using only a minimum monthly payment of $40 and accumulate $6,168 in interest.
4. Look to the future: Credit cards can play into our tendency to prefer rewards now to rewards in the future, even when it isn’t in our best financial interests. The idea of hyperbolic discounting is that people consider the consequences of their choices less the further in the future they fall. It is particularly relevant for retirement planning – so it might be a good idea to think to the future before spending up on credit card.