Why do we spend more with credit cards?

Having a credit card in the pocket often creates an urge to spend. There's hardly any consumer who does not experience these impulses. With credit cards, alongside necessary purchases we frequently end up buying items that are unnecessary or less necessary.

There are both psychological and financial reasons behind overspending on credit cards. Below are 10 key factors, starting with psychological ones.

Credit card users often spend more on credit cards due to psychological reasons. The reasons are:

When making payments with a credit card, money does not visibly leave one’s wallet as it does with cash. As a result, the act of spending has less psychological impact. For example, giving away five thousand taka in cash feels burdensome, but swiping a card for the same amount does not feel as difficult.

Even without cash in hand, purchases can be made instantly with a credit card. For instance, one may desire a new mobile phone immediately and purchase it with a card despite not having sufficient cash.

Many people use credit cards to buy expensive items and appear to be living an affluent life. For example, at a restaurant with friends, one might order costly dishes simply because paying by card feels effortless.

Offers such as reward points, bonuses and discounts encourage additional spending. Different shops offer different kinds of rewards and bonuses. For example, if a shop offers cash back of 500 taka on purchases of 5,000 taka, one might buy 4,000 taka worth of necessary items and then unnecessarily spend another 1,000 taka to avail of the cash back.

Cash payments require constant calculation and awareness of expenditure, whereas card transactions are less visible. This often leads to overspending.

There are also several financial reasons why people tend to overspend with credit cards. The key factors are as follows:

Even without cash in hand, there is no concern, one has a credit card. This ease of access encourages greater spending. For instance, individuals may readily order items online despite not having an immediate need.

A higher credit limit is often perceived as greater spending capacity. This leads to a loss of financial discipline. For example, if a bank offers a cardholder a credit limit of 50,000 taka, the individual feels an increased sense of spending power and consequently spends beyond planned requirements.

Credit card spending does not require immediate repayment. Instead, the bill is due the following month. Many cardholders therefore overspend with the thought, ‘I will settle the bill after receiving my salary next month.’ 

Large purchases, such as televisions, refrigerators or air conditioners, can be paid for in instalments. For example, while a 50,000 taka television may be enough, an individual might purchase one costing 75,000 taka because the card offers instalment or EMI facilities, thus adding unnecessary expenditure. 

Banks and shopping malls frequently introduce attractive offers, which drive additional spending. For instance, a promotion such as – 20 per cent discount on card payments at shopping malls often encourages customers to purchase items they do not truly need.