According to the Wikipedia Edward Bellamy has introduced the concept of the credit card in his novel “Looking Backward” in 1887. Today, it has become an indispensable item in the wallet of most of us.There are approximately 2 billion credit cards in use across the globe at present.The reasons for such popularity can besome or all of the followings depending on the user.

1. We do not have to carry money with us and we are safe
2. Certain credit limit is available with credit cards and we can meet our expenses during a financial difficulty
3. Some merchants offer discounts when purchasing with credit cards
4. Easy to pay bills with figures which are not rounded off as we do not need change money
5. Credit cards help us to maintain high social status

Still, the question is whether most of those implied advantages work in favor of us. Can we accept afore said reasons with a considerable level of objectivity?In fact, we should not take the advantages of credit cards for granted. This article is about some blind spots associated with the use of credit cards which can cause considerable loss to the user often without his knowledge.

First, let us consider the available credit limit. The most important advantage of a credit card is the availability of a certain limit of credit facility according to the opinions of most users. No doubt, this should be the prime motivating factor for using the credit card by the public. Suppose a certain card has got a monthly credit limit of Rupees fifty thousand. In this case we may feel that its annual credit availability is Rupees six hundred thousand, i.e., the multiplication of fifty thousand by twelve. What really happens is we come to conclusions irrationally when we do this type of calculations. The fact we overlook while calculating above figure is that we have to settle our credit card bill every month on a recurrent interval. Therefore, the effective credit amount available for the whole year is only Rupees fifty thousand the equivalent of monthly limit. If wecan keep a balance of Rupees fifty thousand inour bank account at the beginning of the year we really do not need to have a credit card,provided the main purpose of using it is to utilize available credit facility.

I can remember a similar incident where a bank officer came to promote their loan schemes. He presented all the calculations how we had to resettle the loan with monthly installments. At the end he compared the loan value and paid value, and came to the conclusion that obtaining a loan is financially advantageous. Most of the audience left the room happily after the presentation might be with the idea of obtaining the loan. What really happened was that the officer did not apply the appropriate time value of money for thecalculations. As a result of this mathematical manipulation the audience was misled.

Some credit card companies introduce many varieties of credit cards. The main varying factor amongthem is none other than the credit limit. They give their credit cards specific names like Gold, Platinum, Premier and so on. According to those firmshaving a credit card is a prestige for the card holder. Not only that the different categories of cards associated with different levels of social status. According to my personal experience one agent from a credit card firm recommended me the type of the card to be used as an Engineer. Is there any logic in this statementthat it is a prestige to have a credit card?We purchase with a credit card when we do not have sufficient money with us. Then by what means becoming a debtor is prestigious?

Some merchants offer discounts for certain credit cards.However, there is a strategy followed by each business firm when offering discounts. For instance, if we consider super markets all supermarkets will not offer discounts for credit cards of bank “X”. When supermarket “A” offer discounts for credit cards of bank “X”, supermarket network “B” will offer discounts for credit cards of bank “Y”. This strategy by those firms limits our freedom of choice forcing us to purchase from a certain supermarket. Ultimately, we are unable to compare the prices and may end up in paying higher prices than those prevailing in the market.

According to the payment rules of credit card companies we have to make a monthly minimum payment unless the total outstanding balance is not settled on or before the due date. As it seems, it can be a measure to prevent card owner’s debt getting bigger beyond his paying capacity. However, according to new research this compulsory minimum payment has lead card holders to pay off less of their due balance than they would have done. Thus, the card holders have to pay more interest being long term debtors. By the way, credit card interest rates are much higher than average lending rates of financial institutions. The researchers say that this behavior is caused by the psychological bias known as “anchoring”. The effect of minimum payment information acts as a psychological anchor and the card holder’s monthly repayments decrease.

There is another powerful reason, often most of us are unaware, that motivate us to use credit cards. In psychology it is known as “pain of paying”. Suppose you had the lunch in a restaurant with your family. When you pay the bill you will feel the pain of paying.If you can settle the bill either with cash or credit card which one you will feel worse. According to the findings of research those who pay cash will feel worse than those who use credit cards. As it hurts us more to pay cash for the things we purchase most of us prefer to use credit cards. Generally, we settle the credit card bill at the end of the month andonly during that moment we feel the pain of paying. In the meantime, if we are predetermined to pay with credit card when we purchase something this can prompt us even to overspend.Thus, using the credit card more often will make it difficult for you to control the expenditures.

There are some positive sides of paying with credit cards as well. If we pay cash after having meals from a restaurant the agony of parting with our money will reduce the enjoyment we had with the meals. In situations like this if we want to keep our enjoyment undiminishedwe cango for the option of paying with the credit card.

The objective of this article is not to discourage you from using credit cards. As busy individuals we may lack objective reasoning and often get used to spending behaviorswhich are detrimental to us. Being aware ofthe factsalready discussed relevant to credit cards will help you touse this technological innovationprudently.

Eng. Thushara Dissanayake (M-943)
Department of Irrigation