The Psychology of Credit: Paying off card debt

As we mentioned in our article on fees and charges, while we can expect to pay something to access credit, there's no sense in paying more than you have to. The same applies to credit card interest.

If you've struggled to get on top of your credit card debt in the past, you might want to take a fresh approach. Recognise that two forces drive every decision you make: the desire to gain pleasure and the desire to avoid pain. You simply need to use them to your advantage.

Ask yourself honestly why you aren't electing to pay down that debt. Has it been due to a shortage of income? Ask yourself this question - if my monthly income was cut by 10%, could I still live without resorting to credit? If so, you've eliminated this as a reason for not having making higher repayments.

Often we see credit card payments as a necessary evil - one that reduces our ability to enjoy other things like nights out with friends and little luxuries. Do you have trouble perceiving an immediate benefit from making extra payments? If so, this could be the real reason that you haven't been able to reduce your credit card debt.

The trick is to making 'not paying off your debt' more painful, so that you are driven to increase your monthly repayments. Remember that your credit card debt effectively represents money you've borrowed from someone to finance your past expenditure. Is this case that someone is a financial institution.

If it helps, ask yourself this - would you defer repayment of a debt if you had borrowed that money from your mum and dad, or girlfriend, or boss? Or would you just make do and go without those luxuries for a few months? If you'd feel guilty about borrowing from these people, or wouldn't ask out of fear of embarrassment, you might want to apply that 'pain' at the crucial moment you whip your card out to pay for something. It might save you getting further and further into debt.

You can help yourself further by setting up a direct debit each month to pay your credit card as soon as your salary is deposited. After working out your budget, allocate an amount that is more than the minimum monthly repayment, to your credit card. At the end of the month (before payday), if you are running short on cash you might elect to spend the night in, rather than go out and spend the last of that disposable income. Put it towards your card instead and imagine how good it will feel to finally pay off that debt.

Again the key is to come up with a list of reasons that cause you to take action. This will be different for each person. The key is to make it real to you. Be specific.

Published on August 8-th, 2007 in Credit Cards
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.

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