Credit cards are engineered to make sure you become a long-term,
loyal, and indebted customer. Since many of the decisions that consumers
make are not rational, card issuers work on those irrational impulses
to make sure you spend money with their card without thinking logically
about your actions.
Here are four methods that card issuers use to get you to sign up for their cards and keep you in debt. (See also:
Which Type of Rewards Credit Card is Right for You?)
1. Appealing to Your Individuality and Creativity
Once upon a time, credit cards all came in the same boring colors.
But sometime in the past 20 or so years, banks started allowing
cardholders to express their individuality through their credit cards.
Suddenly, you could show off anything from your adorable nephews to your
commitment to the Humane Society with every purchase you made.
Part of what is going on here is something
behavioral economists refer to as the IKEA effect.
This effect causes individuals to value something more if they worked
to create it. Not only does that mean you’re more likely to keep the
inexpensive IKEA bookcase you put together with your own hands for years
after you don’t need it anymore, it also means that you are going to
overvalue the credit card whose cover image you chose.
In addition, your pleasure at seeing the chosen image will make you want to show it off — that is, use it more often.
2. Encouraging Instant Gratification
The very essence of credit — putting off payment — is something that
appeals to a nearly universal cognitive bias called the present bias. (A
cognitive bias
is an error in logical thinking that is very difficult for an
individual to recognize in himself.) Basically, this cognitive bias
makes an individual value an immediate experience over future
experiences.
The present bias is why it’s so easy to stay up late to watch the
"Doctor Who" marathon even when you know you have to get up early the
next day for an important meeting at work.
Now is so much more important than
later in our irrational minds, it can very difficult to make the responsible decision.
This, of course, is why it is so very easy to get into credit card
debt and so difficult to dig out of it. Yes, your future self might need
to work overtime every week to be able to make the payments on your
credit card, but your now self really wants the big screen TV. Card
issuers understand this quirk of human irrationality very well, and they
do everything they can to appeal to our “I want it NOW!” tendencies.
3. Triggering Your Restraint Bias
Most people tend to overestimate their own impulse control; they believe that they will be
able to show more restraint in the face of temptation than is realistic.
This cognitive bias is why your grand plans to lose 20 pounds are often
derailed by the first box of doughnuts you see. You have overestimated
your ability to be virtuous in the face of temptation.
One way that credit cards use this cognitive bias is by offering to
raise credit limits. While some consumers are capable of ignoring that
temptation, there are others who will run up their balance to the new
limit, even after they have convinced themselves that they can easily
handle that much credit.
Another common strategy that triggers the restraint bias is the 0%
balance transfer. In these cases, cardholders convince themselves that
they can pay off the balance before the end of introductory period.
However, many of those who take advantage of these offers are unable to
show the restraint necessary to pay off their balance before the
interest starts accruing.
4. Making You Fear a Loss of Perks
Many credit cards offer perks,
from cash back to travel miles to money for college. The problem with
these perks is that in many cases, cardholders are spending much more in
interest than they are earning through the perks. Why would they do
something so clearly irrational? Because of loss aversion.
Behavioral economists have discovered that human beings tend to
irrationally overvalue something they already own or have. For example,
plenty of investors have held onto tanking stocks for far too long
because they are afraid of losing their original stake. They
irrationally hope that the clearly dead investment will recover.
Loss aversion is also the reason why cable companies are happy to
offer customers a free trial period of premium channels; viewers are
much more likely to pay money to keep from losing something than they
are to buy it in the first place.
And of course, loss aversion is a major reason banks offer credit
card perks. While cardholders who pay off their balance each month are
certainly making money on the perks, the majority of cardholders are not
able to do that. If they were, banks would stop offering the perks
because they would be the ones losing money.
For most consumers with perks credit cards, the fear of losing the
airline miles
will keep them charging on a card that they probably should have cut up
long ago. They are afraid of losing that “free” flight, even though
they are clearly paying for it.
Beware Your Irrational Brain
It can be difficult to responsibly use credit because our irrational
brains and the manipulations of the credit industry are working against
us. The best way to handle credit is to make sure you are conscious of
your decisions and your irrational quirks before you whip out the
plastic.
source:
wisebread.com
