Ways to check your spending spree

It is no secret that you spend more when you use your credit card than if you pay cash. But will your spending behaviour change if you use a debit card instead? It turns out that behavioural psychology can throw some light on this issue.

Consider credit card purchases. You buy and enjoy the product today but your credit card payment is typically due a month later. The pain of paying is distanced, while the pleasure of owning the product is immediate. This immediate gratification can sometimes drive you to indulge and stretch your household budget.

Product features

Behavioural psychologists have also found another interesting behaviour about credit card purchases. Most individuals focus on the features of the product that they buy while using a credit card.

Whereas these individuals focus on the cost of the product when they pay cash. The finding is not entirely surprising. The pain of parting with cash forces you to measure the amount you give up while the distancing of the pain in the case of the credit card drives you to look at the joy of owning the product.

The question is whether you would behave differently if you use a debit card instead of a credit card. It appears that debit card could be better than a credit card, but not as good as cash. The reason is simple. The pain of parting with cash is only virtual and not physical in the case of a debit card. Your brain cannot simulate the pain based on virtual cash, as it can with physical cash. You can no doubt visualise your bank balance reducing, with the instant message of transactions on your mobile. But that is unlikely to have the same effect as parting with cash from your purse.

What’s better

This does not mean that debit cards are no better than credit cards. In fact, you should use a debit card if you want to control your spending.

Instead of overloading your credit card and consequently paying high interest on the amount outstanding, you can use your debit card and only spend the amount you have in your bank account. If you choose to use a debit card, have a separate bank account for your spending needs.

This would help ensure that you do not wipe out your regular bank account where your salary is credited every month. And if you have serious problems with self-control, use only cash for your purchases. The instant pain of paying is the only factor that can slow you down from spending all the money in your bank account.

(The author is the founder of Navera Consulting. Feedback may be sent to >knowledge@thehindu.co.in )

COMMENT NOW