Psychology Ethics Between Credit Card and Cash Money Spending - Coursework Example

PSYCHOLOGY ETHIC BETWEEN CREDIT CARD AND CASH MONEY SPENDING Abstract This paper examines the psychological justification behind credit card spending in lieu of cash money spending. Apart from the ease with which one can make purchases on credit cards, they have promoted the culture of spending for necessaries of life without having to postpone acquisitioning them until the individuals are able to save enough money to acquire them. It may take years to do so. During that period, people have to sacrifice enjoyment of or suffer for want of these necessaries of life. The advent of credit cards has made millions of peoples’ lives enjoyable with some costs. Judicious spending whether on cash or credit card should be the norm. Credit cards are rather weapons for consumer protection and welfare and as long as they are not misused or abused, it will remain a strategic weapon in the hands of the consumers for their wellbeing. The credit cards have therefore come to stay for the obvious reasons of psychological protection and satisfaction, they provide to consumers. Introduction Monetary behavior of human being has not been dealt with by psychologists until recently as they believed it was the domain of economists. Besides, they are also pre-occupied with many more serious issues in psychology.1 It is only after the credit cards have become a compulsive way of life, psychologists have tuned their attention to this field also. People are now addicted to credit card spending. Credit card companies have learnt to exploit the human behavior towards credit cards. A study has therefore become necessary to examine rationale behind majority of people’s preference of credit card spending to cash money spending. This paper shall examine how and why credit cards have been made an inevitable way of spending and whether it is desirable to cultivate or curtail the habit and ascertain the role of psychology ethic in cash money spending and credit card spending. The methodology of research being adopted for the purpose is literature review since literature is rich with credit cards’ history and functioning. Literature Review First, it may be pertinent to understand the psychology of money vis-à-vis satisfaction. As said earlier psychologists have shied away from money related psychology for it was thought to be the domain of economists. Recent authors have tried to relate money with psychology. Money is a measure of satisfaction derived by them in purchase of goods and services. Although it may appear that people having large income are happier, psychologists suggest that studies give different findings. They first examine whether money would acquire happiness and then explore the psychology of craving for money.2 There is no causal relationship between income and wellbeing.3 Satisfaction due to wage increase does not last long due to other variables such as adaptation, comparison, alternatives and worry. By adaptation, it is meant that once the worker gets adapted to the increase, satisfaction disappears. It is a costly proposition for the employer to give frequent increases for an enduring satisfaction. By comparison, it means, once the worker move up the ladder by joining wealthier individuals, he would find himself in the midst of even more wealthy people. Thus the inadequacy will be always felt at all levels giving no guarantee for a permanent satisfaction. Alternatives indicate diminishing marginal utility of money compared with other variables like freedom, true friendship etc. And lastly, worry. More money begets more worries like concerns for self development and more control over one’s life.4 Consumer credit a precursor of credit cards has been a tool of social control impact of which is such that an individual having no credit history remains a non-entity. It has been an economic force in that good repayment records are associated with rewards and defaults in payments are charged with sanctions. Besides, people are able to acquire goods without instant payment responsibility. At the same time it carries with it liabilities and binds consumers into the social system. The consumers are driven to choose between conformism and autonomy. However this had not been popular until the mid 20th century and it was only after the world war II, consumer spending was encouraged in order to boost production. Since then consumer credit is not viewed as a social stigma. The problem with it is that it is liberally granted as well as withdrawn, leading to bankruptcy of the consumer to last for seven to ten years in the credit records. Consumer credit was in the order of $ 655 billion by late 1980s.5 It has now grown by three times and one is considered abnormal if one does have not a credit card considering a billion of credit cards in circulation in the U.S. 37% of the credit card holders draw advances from one credit card to pay off another card. Two thirds of the card holder holders ‘live from pay check to pay check.’ Bach writes that many people who appear rich are actually burdened with huge debts and that one can not become a millionaire with high interest rates on credit card dues which would normally take 30 years to repay. 6 An average American carries 3 to 4 credit cards at time with a total debt of around $ 2,000 paying interest charges alone. Besides he has a car loan, a mortgage, and a second mortgage. Most of the credit card holders are somewhere in the middle of freedom-from-debts and under-clutches-of- debts.7 Vyse 8 lays down variables under what he calls “physics of spending” attributed to human psychology people are subjected to during the last four decades. They are: “Availability of the Spending Response, the Wherewithal, Time, Effort, and Social Barriers to Spending” 9 The above five variables influence spending behavior that leads to bankruptcy. The first variable is that the mere presence of products in the market tempts people to buy if offered on credit. People who have ready cash earmarked for other purposes tend to make impulsive purchases on cash even if no credit is available. Since products are available next street or door-delivered unlike in the olden days, people do not hesitate to buy. Constant exposure of the product to consumers is a strong psychological force driving the consumers to purchase. The second one called wherewithal to purchase, need not always be ready cash. The marketers are ready to sell goods against credit cards. People do not hesitate to carry large balances on cards in spite of availability of sufficient cash to pay them entirely. Even though credit card interest would eat away their cash in the long run, they still won’t pay make cash money spending if purchase through credit card is possible. The reason being, they want to preserve cash for emergencies like illness, vehicle repairs and household repairs. The third variable of time, man’s short run behavior is often in conflict with his long term goals. The short run behavior of impulsive purchases is triggered by ready possession of credit cards. The fourth variable known as effort is explained by the effortless manner of purchasing things. When there were more efforts to be made for a buying, like having to travel long distance and having to carry cash, the gap itself had acted as a barrier. It is no longer there now. The fifth variable of social barriers to spending proposes that it can be either a positive or negative response to spending when coming into contact with people. Such as when a sales person compliments the purchaser that he would look great in the suit he wants to buy. Negative barriers come into play when the buyer shies away from sales people or when sales person happens to be overbearing. But since most of the market places are now self serviced and operated through the internet, chances for negative response are minimal.10 Dave Ramsey who is the protagonist for freedom from debt suggests seven ways for a debt free life. They are: deciding not to incur any more debt, starting an emergency fund of $ 1,000, cultivating debt-snowball by saving every possible frivolous items, keeping 3 to 6 months expense in savings, investing 15% of household income in retirement plans, starting college expenses funding for children, closing home loans early, and building wealth in mutual funds and real estate.11 When ever using credit card, an individual does not feel like he is spending real money. He willingly does it in order to avoid the unpleasant cash payment. So he enjoys while purchasing without being connected to the pain he would experience at the time credit card’s actual payment. It has been observed that people will be spending less while paying in cash.12 Jones and Roberts,13 says that consumer culture is so deeply rooted in society that everyone wants to be part of consumer culture. Their finding that a compulsive buying using credit card is driven by power prestige, distrust, and anxiety. Due to the convenience of cashless spending and rewards they get, consumers use credit cards for their purchase of good and services. Pampered with 0% on every thing, they ultimately end up with credit card debts. The reasons are not far to seek. Because they want always more, their debts mount eventually with badly programmed way of financial management, spending habits and faulty mindset.14 Discussion The literature review is almost unanimous about the bad features of credit card spending. Yet people are ready to sacrifice by spending on consumer items by credit cards for the sake of loved ones. In a household if both husband and wife have no will power, they tend to use cards indiscriminately for satiating their essential needs and undesirable luxuries. They do so knowingly that they are incurring debts. False prestige and false pretenses of capitalism as depicted in Arthur’s Death of a Salesman in American dream are the reasons for unbridled spending on credit cards. Credit card companies, who profit on marketing credit cards, earn huge profits at the cost f the consumers. Though they advocate responsible spending and advice repayment within the interest free period of 55 days or more, they do not impose the conditions on the card holders. Card issuers are content with the repayment of minimum 5% per month which is just sufficient to meet their monthly interest and administrative charges. In the long run they will have recovered the principal amount even if the card holder defaults later. And to continue with the momentum, at a time when the card holder is about to default, another issuer comes to his rescue and the practice goes on and on throughout one’s life. Americans do not save cash. The borrowing power they have by way of credit cards gives them the equal confidence. In fact, the business culture of even large corporations always dependant on outside funds for their working capital and for even fixed capital requirements has permeated the household management also. Just as businesses are proud of borrowing and consider payment of interest as one of the factors of production, household management also justifies payment of interest on funds required for day to day running of their families. Consumers psychologically justify credit card spending which the card issuers exploit or rather identify consumers’ needs and provide a way of decent living. Cash is considered sacred and whatever little the consumers have, is preserved for certain emergency situations where credit cards can not be used. Ever since the end of World War II, the culture of credit cards has become the inevitable part of life and after 1970 credit cards’ growth has been phenomenal. Though cash money spending saves interest costs, credit card spending is still preferred as a modern way of life for its obvious advantages of ready availability and avoiding carrying risks. Though debit cards have come of late replacing the need to carry cash, the emotional attachment to cash for obvious reasons still prevails. Conclusion The objective of this paper is to justify or reject rationale behind majority of people’s preference of credit card spending to cash money spending. The forgoing literature and discussion lead to the conclusion that credit card spending prevails over cash money spending for psychological reasons even though it is not economically justified. The modern living is driven by the urge to live the full life and there is no need to miss the opportunities to enjoy at various stages of life merely for want of own cash (funds) which the previous generations have miserably missed. This psychological trait is found to be dominant in the spending decisions of people all over the world. The capitalist Governments have promoted consumption economy which in turn promotes perpetual production of goods and services demand for which should not hindered for want of spending capacity on the part of consumers. The credit card spending has certainly promoted growth business as well growth of economy measured in terms of Gross Domestic Product. (GDP). Bibliography Bowden-Butler Tom, 50 Success Classics Winning Wisdom for Work and Life from 50 Landmark Books Nicholas Brealey Publishing, 2004 p 230 Furnham Adrian, Argyle Michael, The Psychology of Money, Routledge 1998 Jones Eli, Roberts A James Money Attitudes, Credit Card Use, and Compulsive Buying among American College Students, Journal of Consumer Affairs, Volume 35, issue 2, page 213-240 Klein Lloyd, It's in the Cards: Consumer Credit and the American Experience Greenwood Publishing Group, 1999 p 1-8 Lockwood Georgene Muller, The Complete Idiot's Guide to Simple Living Alpha Books, 000 p 58 Money and Minds, available from http://www.moneyandminds.com/credit-card-minds/accessed 11November 2008 Patrick Dave, Feb 25, 2008, Ramsey’s 7 Baby Steps Cash Money Life, available from< http://cashmoneylife.com/2008/02/25/dave-ramsey-baby-steps-financial-peace-university/ >accessed 11 November 12, 200 Psychology of Spending Money available from accessed 11 November, 2008 Vyse Stuart, 2008 Going Broke: Why Americans Can’t Hold on to Their Money, Oxford University press, p 92-116 8 Read More