Several of my friends in the recent past have cancelled all but one of their credit cards.

One of them is even considering giving up all his credit cards and using cash for all purchases!

You may, perhaps, have one or more credit cards yourself. The question is: Are credit cards good for you?

You know that your purchase decision is a function of two factors- the satisfaction that you believe you will derive from using a product and the pain of paying for it. Needless to say, you will buy the product only if the pain is lower than the perceived satisfaction.

There is, however, an inherent problem with our purchase decisions! The pain of paying for a product is in the present- at the cash counter in the store.

The pleasure derived from buying the product is often in the future- when you actually use it. Now, studies in psychology have shown that we typically overestimate the happiness or the unhappiness a future event can cause us.

This suggests that you will be typically disappointed with your purchase decision because you would have overestimated the satisfaction you will derive when you use the product!

Pain of paying

Your purchase decision is further compounded when you use a credit card! Research in neuroscience has shown that you do not really feel the pain when you pay with your credit card! Why?

Swiping plastic does not trigger the same response as paying hard cash. The pain due to parting with cash hits you only when you write a cheque to your credit card company, not when you use the credit card!So, now you have both factors relating to your current purchase decision affecting you only in the future- the pain of paying and the pleasure of using the product. This means that your purchase decision today is based on how your brain simulates the future experience.

The problem is that, more often than not, your simulator is likely to give you wrong message!

Behavioural psychologists call this affective forecasting. It refers to the systematic error that you make in overestimating your future experience.

All these factors point to, perhaps, a plausible conclusion- we are typically bad at deciding whether a product is useful or not when we buy it. Using a credit card for our purchases only compounds the issue at hand! But this does not mean that you should not have a credit card. Having a card has its advantages- you do not have to carry wads of cash to make bulky purchases.

That said, remember that your brain is not hard-wired to using credit cards. So, beware!

(This article was published in the Business Line print edition dated May 13, 2012)
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