Credit Cards - Case Study Example

Most Americans Should Not Use Credit Cards According to the studies, people tend to spend more when they do their transaction through credit cards instead of cash, this is mainly due to liquidity control. People who use credit cards underestimate their expenses, and spend more than their budget. Many reputed people in America were filing bankruptcy form, and restricted themselves from meeting their liability by declaring themselves insolvent. Introduction Since last four years, personal credit card debt has been two times it was earlier, personal bankruptcy is going to its peak, and in spite of everything Americans are making expenses even when they do not have money. Credit cards have enormous advantage in our daily routine; it permits the holders to shop effortlessly online and liberates to buy things from market without taking cash in hand. But there are many drawbacks of using a credit card when few unlucky card users overestimate their capacity, increase their liability and creates trouble for economy. The main problem in using credit cards is that people do not get the realization of their expense, they find it trouble free and speedy to swipe the card through the machine. But if they pay through cash, they will realize how much they are actually spending. By payment through cash, people actually experience that they are losing money, while with credit cards, they do not feel they have paid anything. Credit cards even encourage people to purchase beyond their capacity to pay, just like it sometimes makes them pay extra for a thing. It is better to stay away from such a circumstance and discovering the use of credit card is risky, you should protect yourself from getting into complexity. Individuals who use credit cards in their daily life find difficulty in managing debt and restricting themselves to buy only what is required and essential (Fawley & Fox, 2010). From 1970 onwards, the commonly known surmise, that credit cards promote expenditure, has been constantly receiving supporting evidence. Whenever a person makes a visit to a store, he automatically spends more if has more credit cards (Hirschman, 1979), and when he enters a restaurant, the tip amount increases if he pays by card (Feinberg, 1986). Moreover, people who carry credit cards often underrate their expenses or even forget the value they have given for their transaction (Soman, 1999). Just like fast food fashion, the ostensibly immaterial fact of the credit card is bringing a different cultural variety and modifying the social economy. Credit cards are not only crucial in the developing world, but they offer spectacular benefits to the masses. But, with the extensive and wholesale use of credit cards, the destructive consequence of its plentiful risks is unnoticed, particularly by younger Americans, and many people in the world, because they are impatient to adopt credit card system as part of their lives (Ritzer, 1995). The number of insolvency cases from 1880 to 2004 in United States has risen from 288,000 to 1.5 million every year, that is, approximately five times. More Americans were filling the forms of insolvency than for getting admission to college, divorce case or getting cancer diagnosis. Gradually, insolvency was no longer criticized by the community, as numerous rich and reputed people were filing for bankruptcy, bankruptcy was highly hyped, and the people started taking bankruptcy as a measure to stay away from the pay back of their liability (White, 2007). Study This study confirms that when people use credit cards, they tend to pay more for their need. It will also examine the results when the offer price of the item is not known. Prize This study is planned to bring forth readiness to spend for buying the sport match ticket. The sale was for two different pairs of ticket. The match between the Boston Celtics and the Miami Heat constituted one pair of tickets. To conform the division title, the Celtics had to win, and it was quite early sold out similar to all Celtics games at that time. The match was held on Sunday afternoon. The regular term baseball match, the Red Sox versus the Toronto Blue, constituted the second pair of tickets. A consolation prize was also arranged of a pair of poster (one highlighted by Celtics and another by Red sox). The offer prize of none of the three prizes was given by us. The precise explanation is: 1. Game between Celtics and Miami on April 19, Sunday, 1PM, at the Boston Garden. 2. A pair of bench tickets for Red Sox- Toronto game. On April 19, Sunday, 1PM, at the Fenway Park 3. For the Celtics and the Red Sox banner, a consolation prize was arranged. Respondents and Course of Action The MBA learners were selected for research, who were given a chance to buy Celtics tickets and asked to answer an advertisement assuring a$2 cost. The research was conducted in the lecture hall during afternoon. As the students were coming into the classroom, they were given a rule book containing details of the prizes, the system of allotting tickets, and a paper in which they can mention their reservation price. The students were asked not to disclose the answers or any other thing related to the questions. The students answered the questions and submitted the sheets and moved out. Students were informed that results shall be declared in afternoon, 5PM. According to the method followed by us, the winner shall be the one who quotes the maximum price, however the next maximum quoted price shall be the price at which the prize will be sold (Prelec & Simester, 2000). As per such guidelines, respondents would not overrate or underrate their actual highest ability to spend (Vickrey, 1961). The Cash versus Credit Card Manipulation Two sort of response paper were given in a casual way. The cash term was mentioned in the first type of response paper, which clearly stated cash payment. Availability of ready cash was also required to be stated by the participants. The credit card term was comprised in the second type of response paper, mentioning credit card as the means of payment. The type of card used to buy the prize (Master Card or VISA), its validity date, and credit card`s last three digits had to be stated by the participants. For both the situations, the sum had to be paid by the participants by 5PM the other day. Being a little tricky, we decided to offer tickets not exceeding the fair value to the winner, and in both cases would allow check acceptance. Results It was discovered that for all three prizes, participants under the credit card terms of payment quoted considerably more price. The rationale behind the monetary advantages of using credit cards fell considerably short compared to the readiness to pay extra by credit cards for all three tickets, mainly for the Celtics. Therefore, it can be concluded that people agree to pay more if they use credit cards and this may result in their budget imbalance. (Prelec & Simester, 2000). References Fawley, L., Fox, H. (2010). Why Americans Should Not Use Credit Cards. Axia College of University of Phoenix. Feinberg, R. A. (1986). Credit Cards as Spending Facilitating Stimuli: A Conditioning Interpretation. Journal of Consumer Research, 12, 384-356. Hirschman, E. C. (1979). Differences in Consumer Purchase Behavior by Credit Card Payment System. Journal of Consumer Research, 6, 58-66. Prelec, D., Simester, D. (2000). Always Leave Home Without It: A Further Investigation of the Credit-Card Effect on Willingness to Pay. Kluwer Academic Publishers, 2-8. Ritzer. G. (1995). Thousand Oaks, CA. Pine Forge Press, 240. Soman, D. (1999). Effects of Payment Mechanism on Spending Behavior: The Illusion of Liquidity. Working Paper, Hong Kong University of Science and Technology, Hong Kong. Vickery, W. (1961). Counterspeculation, Auctions, and Competitive Sealed Tenders. Journal of Finance, 16, 8-37. White, M. J. (2007). Bankruptcy Reform and Credit Cards. The Journal of Economic Perspectives, 21, 175-200. Read More