Psychology of Credit Card Spending: why we overspend and how can we stop this

[RadioactiveTabela]

Before every single spend, I now ask myself: would I have brought this anyway without credit card rewards?

For illustration:

Let’s say spending 100k in a year gives me a 10k taj voucher. I’m at 80k spent already. I can easily afford spending the 20k loading Amazon gift cards or whatever. But I did not really have any shopping worth 20k planned. Nor would I bother staying in Taj without the voucher, I would be fairly happy even with a Lemon Tree.

I feel this lifestyle creep is something we should be mindful of. Sure, you can afford to transfer the 20k to your cc payment savings account without blinking an eyelid. But should you?

 

[Deleted member 9785]

Before every single spend, I now ask myself: would I have brought this anyway without credit card rewards?

For illustration:

Let’s say spending 100k in a year gives me a 10k taj voucher. I’m at 80k spent already. I can easily afford spending the 20k loading Amazon gift cards or whatever. But I did not really have any shopping worth 20k planned. Nor would I bother staying in Taj without the voucher, I would be fairly happy even with a Lemon Tree.

I feel this lifestyle creep is something we should be mindful of. Sure, you can afford to transfer the 20k to your cc payment savings account without blinking an eyelid. But should you?

There will be severe widrawl symptom for people doing business class/first class and luxury hotels only because of miles now shifting back to what they could afford. Worse, if their families got used to it

 

[RadioactiveTabela]

There will be severe widrawl symptom for people doing business class/first class and luxury hotels only because of miles now shifting back to what they could afford. Worse, if their families got used to it

Right, so these are the people who would've booked that Taj anyway, with or without CC vouchers. If that's the lifestyle they always wanted, good for them.

I was more concerned about people being nugded into lifestyle creep by CC, especially lifestyle creep they didn't not really desire / yearn to begin with.

 

[starstruck]

I am going to close Amex MRCC this year after getting the voucher. Its not worth it.

 

[Deleted member 9785]

The ugly truth when you get into debt trap

 

[Deleted member 6719]

There will be severe widrawl symptom for people doing business class/first class and luxury hotels only because of miles now shifting back to what they could afford. Worse, if their families got used to it

I used to do that travel, and i liked radisson/hilton over Taj's.

 

[srikant]

If i am transferring all the amount to credit card (even before the bill generates).. will it have any impact on Cibil?

This is likely to get utilization reported as ZERO, which isn't good. Keep it betwen 1 and 9% for best impact on CIBIL. If you're terrified of defaults, set up autopay. You can pre-pay larger spends but let smaller ones give you a small utilization - and get auto-paid on due date.

 

[Sourabh_13]

Hello TFCians,
"I have posted an article on the TF Blog regarding the psychology of credit card spending - why we overspend and how we can prevent it.
Read it here: https://www.technofino.in/psycholog...nding-overspending-and-strategies-to-stop-it/
In the article, I shared my opinion and a rule that everyone should follow to avoid overspending.

Credit cards can be double-edged swords, and I would love to hear your thoughts on this topic.

How do you prevent yourself from overspending when using a credit card? Let's discuss."

I follow a similar strategy. Instead of transferring the money from the primary bank account to another bank account, I transfer it to a liquid mutual fund.

 

[viznu99]

I follow a similar strategy. Instead of transferring the money from the primary bank account to another bank account, I transfer it to a liquid mutual fund.

Can you elaborate .. Do you mean arbitrage funds ? Isn't the interest rate at par .. Any benefits of doing so ?

 

[Sourabh_13]

Not the arbitrage funds. They invest money in equity-oriented instruments. Any fund that invests in equity has a high expense ratio.

Liquid funds on the other hand invest money in safe (mostly gov) debt-oriented instruments. So the expense ratio is low. As the name suggests, these funds have no lock-in period, allowing us to sell them whenever we want. Another advantage is the risk. Liquid funds are less riskier than the arbitrage funds.

If I am looking for some other place to park my money which I was supposed to park in a savings account, I would try to find a place that offers similar risk, liquidity and higher interest. I think liquid funds are best-fit for it.

In addition to all the advantages of transferring money to another saving account (like keeping track of and control the CC expenses), liquid funds give around 7% pa interest (deposited daily...equivalent of 1-day) than a saving account that only offers 2-3% pa interest.

If you have any other opinions, do let me know.

 

[viznu99]

Not the arbitrage funds. They invest money in equity-oriented instruments. Any fund that invests in equity has a high expense ratio.

Liquid funds on the other hand invest money in safe (mostly gov) debt-oriented instruments. So the expense ratio is low. As the name suggests, these funds have no lock-in period, allowing us to sell them whenever we want. Another advantage is the risk. Liquid funds are less riskier than the arbitrage funds.

If I am looking for some other place to park my money which I was supposed to park in a savings account, I would try to find a place that offers similar risk, liquidity and higher interest. I think liquid funds are best-fit for it.

In addition to all the advantages of transferring money to another saving account (like keeping track of and control the CC expenses), liquid funds give around 7% pa interest (deposited daily...equivalent of 1-day) than a saving account that only offers 2-3% pa interest.

If you have any other opinions, do let me know.

Thanks.. Will check it out 👍

 

[brightknight]

Not the arbitrage funds. They invest money in equity-oriented instruments. Any fund that invests in equity has a high expense ratio.

Liquid funds on the other hand invest money in safe (mostly gov) debt-oriented instruments. So the expense ratio is low. As the name suggests, these funds have no lock-in period, allowing us to sell them whenever we want. Another advantage is the risk. Liquid funds are less riskier than the arbitrage funds.

If I am looking for some other place to park my money which I was supposed to park in a savings account, I would try to find a place that offers similar risk, liquidity and higher interest. I think liquid funds are best-fit for it.

In addition to all the advantages of transferring money to another saving account (like keeping track of and control the CC expenses), liquid funds give around 7% pa interest (deposited daily...equivalent of 1-day) than a saving account that only offers 2-3% pa interest.

If you have any other opinions, do let me know.

What about ITR aspect? Can you shed some light on it? On FD it's an easy way to file return over interest recevied but what about LF if redeemed partially?

 

[Deleted member 9785]

 

[RAMESH BABU N]

By opting for only BASIC cards, you will not be in that milestone-based-race to spend.

Or, do not buy expensive food in costly restaurants - because some bank gave you a dedicated hi-class dining card.

Or, casually opt avoidable EMIs - because cards are inducing you with zero interest EMIs.

Or, get assets n items - you never planned to have - on BNPL basis.

REMEMBER that CCs are meant to be a replacement for carrying cash. Ignoring that basic rule n using CCs as a source of income or using CCs for flaunt-value is a sure sign that you are on the wrong path.

 

[RAMESH BABU N]

One more aspect to be kept in mind.

Instead of having separate milestone-based CCs for family members, which induce unnecessary spendings, go in for Add-on cards.

Do not run after Limit Enhancements every 3 months. Time to STOP and take a closer analytical look into your spending habits or patterns. Do you really need those LEs - 3 or 4 times each year ?

Remember - sellers n traders will always come up with better offers n freebies. The have got no option than to sell. That's why they are there.
But, you need NOT buy every such service or stuff. You are NOT living only for that.

AVOID peer pressure. Just because 6 of your friends have MAGNUS or INFINIA does not mean you too must have it. Saw a lot of guys (even in this forum), who got cards, but do not know why they opted for it or even how to use them. Is is really necessary to be in such a situation ?

 

[dvader]

One more aspect to be kept in mind.

Instead of having separate milestone-based CCs for family members, which induce unnecessary spendings, go in for Add-on cards.

Do not run after Limit Enhancements every 3 months. Time to STOP and take a closer analytical look into your spending habits or patterns. Do you really need those LEs - 3 or 4 times each year ?

Remember - sellers n traders will always come up with better offers n freebies. The have got no option than to sell. That's why they are there.
But, you need NOT buy every such service or stuff. You are NOT living only for that.

AVOID peer pressure. Just because 6 of your friends have MAGNUS or INFINIA does not mean you too must have it. Saw a lot of guys (even in this forum), who got cards, but do not know why they opted for it or even how to use them. Is is really necessary to be in such a situation ?

By opting for only BASIC cards, you will not be in that milestone-based-race to spend.

Or, do not buy expensive food in costly restaurants - because some bank gave you a dedicated hi-class dining card.

Or, casually opt avoidable EMIs - because cards are inducing you with zero interest EMIs.

Or, get assets n items - you never planned to have - on BNPL basis.

REMEMBER that CCs are meant to be a replacement for carrying cash. Ignoring that basic rule n using CCs as a source of income or using CCs for flaunt-value is a sure sign that you are on the wrong path.

Your analysis is on point and accurate.

Personally, I have learned to ignore spend-based offers altogether.

The only time I even search for spend-based offers is when I am about to make a big purchase; say, during the festive season, and then find out the best card for my spending instead of the other way around of trying to complete the milestone.

 

[Sourabh_13]

What about ITR aspect? Can you shed some light on it? On FD it's an easy way to file return over interest received but what about LF if redeemed partially?

We have to pay STCG or LTCG tax on the profit received by selling the fund units. I think I have not understood your question.