Our irrationality toward money and inability to fully visualise the impact of distant events is how credit card companies thrive and many bank balances suffer.
That’s the conclusion one draws after reading this article from Time that looks at a number of studies showing that we fail miserably in making logical decisions about money when we use credit cards rather than cash.
As a species we’re just really bad at understanding costs that come later on. Instead, we assign a disproportionate amount of importance to what’s immediate and tangible. […]
Once we’ve got our card in hand, our behavior becomes riddled with irrationalities. In one experiment, Drazen Prelec and Duncan Simester of the Massachusetts Institute of Technology found that people were willing to pay twice as much for basketball tickets when they were using a credit card as opposed to paying cash. Credit-card spending just doesn’t feel like real money. In another study, Nicholas Souleles of the University of Pennsylvania and David Gross of the consultancy Compass Lexecon calculated that the typical consumer unnecessarily spends $200 a year in interest payments by keeping a sizable stash of cash in savings or checking while at the same time carrying a credit-card balance. In our heads, the two don’t line up.