In India, the amount of outstanding credit debt is a concerning 2 lakh crore according to Reserve Bank of India 2023 statistics. With approximately 8.5 crore credit card users in the country in April 2023, up from 7.5 crore users the previous year, it is evident that credit card usage is on the rise. This trend reflects the growing popularity of credit cards as a preferred mode of payment for goods and services in lieu of cash, cheques, and other forms. The development of financial services has made credit more accessible and consequently led to an increase in the use of credit cards. This increase in credit card usage is not without its consequences. It reveals a lot about human behaviour and the psychology behind credit card usage.
The surge in credit card popularity, especially among the youth, has shifted payment preferences, overtaking debit card transactions. A notable milestone was reached in June 2023 when credit card transactions in India surpassed those with debit cards. This trend is supported by merchant payments using credit cards, totalling 25 crore in April 2023, exceeding debit card payments at 22 crore. Credit card transaction value significantly outpaced debit cards, with transactions amounting to Rs 1.3 lakh crore, compared to Rs 53,000 crore for debit cards.
When we delve into the psychology of credit cards, it becomes apparent that their widespread use is associated with various factors and behaviours. The accessibility and convenience offered by credit cards have undoubtedly shaped attitudes towards spending and individuals' approaches to managing debt.
Psychology and Lots of Lovely Credit:
Credit cards have undeniably become an indispensable aspect of our daily lives, providing us with convenience and instant gratification. One interesting finding is the role of self-worth in spending behaviour. Professors of Marketing, O'Guinn and Faber(1988) found that individuals with higher self-worth tend to engage in more credit card use. This suggests that for some people, using credit cards may serve as a way to validate their self-worth and boost their confidence. Additionally, another psychological factor that influences credit card use is self-control. Research has shown that individuals with lower levels of self-control are more likely to engage in impulsive spending and accumulate credit card debt. They may give in to temptation, overspend, make only minimum payments each month, or use credit for unnecessary purchases due to its availability(Kiyilar and Acar, 2013).
Some studies have focused on the temporal and physical separation between receiving goods and paying for them, which may encourage credit card spending and lead to credit card debt. For instance, when we use a credit card to make a purchase, there is a temporal gap between the act of acquiring the goods or services and the actual payment. During this gap, our perception of the transaction is altered, and we may prioritise immediate gratification over the financial consequences. Research has also shown that the use of credit cards can lead to increased spending compared to cash or checks. The findings from previous studies highlight the influence of credit cards on consumer spending behaviour.
The introduction of temporal decoupling in credit card transactions brings attention to the psychological concept known as the "pain of paying"(Zellermayer, 1998). This concept explains that parting with money, whether through physical cash or electronic means, invokes an emotional response. With credit cards, this "pain of paying" can be lessened due to the time gap between acquiring goods and making payments. Recent studies have shown that consumers' post-purchase connection with the product is stronger when paying with cash compared to credit cards. This suggests that using cash can create a more tangible and emotional connection to our purchases, making us more aware of the value of our money.
Furthermore, it's important to acknowledge that certain credit card users prioritise immediate gratification without fully considering the potential long-term consequences of accumulating debt. A noteworthy observation is that multiple credit card holders often orient their debt repayment strategy towards attainable short-term goals, rather than the broader objective of becoming debt-free, unveiling the psychology of goal illusion. This behavioural inclination leads them to allocate resources towards settling debts with lower balances and rates, a phenomenon that might seem counterintuitive. Additionally, the source of funds plays a role in shaping human behaviour; windfall money tends to intensify the preference for addressing smaller debts(Besharat et al.,2014).
An out-of-bank experience
In the midst of the ongoing shift towards digital payments, researchers are actively exploring how contactless and mobile payments impact our spending habits. This investigation holds particular relevance in India, where personal relationships with bankers used to be a common practice. Credit card users often had close connections with their bank representatives, fostering trust and responsibility in financial management. However, with the rise of online banking and digital payments, this personalised connection has been diminished. Obtaining a credit card today is as simple as clicking a few buttons, exemplifying seamless processes. But amidst this convenience, what are we giving up?
Professor Sutherland from the Sloan School of Management at MIT highlights a significant shift due to the rise of technology that allows people to share information. This change has led to a decline in what's known as "relationship lending." In addition, research suggests that shifting from personalised due diligence processes to centralised sources such as credit ratings and scores contributed to a wave of coordinated defaults during the financial crisis, exacerbating its impact (Goczek & Witkowski, 2015, Sutherland 2018). This technological shift in the financial sector has not only changed the way we spend and manage our money but has also transformed the personal connections and relationships we once had with financial institutions. This brings up questions about the future of credit and how it relates to economic growth and consumer spending habits.
But cash seems to be making a comeback, with many people opting for its tangible nature and the sense of control it provides over their spending. If TikTok trends are anything to go by, it seems that carrying cash has become a trend, with users showcasing their "cash-only" lifestyles and the satisfaction they derive from physically seeing their money and knowing exactly how much they have to spend. This resurgence of cash usage demonstrates a desire for more tangible control over personal finances, pushing against the increasing digitization of payments.
The shift away from cash could have an impact on monetary policy, financial stability, and consumer behaviour on a larger scale. Furthermore, with the ease of online transactions leading to increased impulsive spending and reduced savings, there may be consequences for individual financial well-being as well as broader economic indicators.