Used the wrong way, credit cards could lead you buried in debt. Your brain and your natural impulses may be to blame.
With that in mind, Motley Fool analysts Michael Douglass and Nathan Hamilton discuss how succumbing to spending urges can lead you to fall short of financial goals. Chances are, you'll fall into these traps as well (blame your brain!), but there are four simple ways to flip the odds in your favor so you can crush your budgeting goals.
Michael Douglass: Nathan, let's talk about a particular credit card trap that is ridiculously easy to fall into, in part because there's a biological component to it. Let's talk for a minute about dopamine.
Nathan Hamilton: Yes, we're going to get super scientific here...
Douglass: Game on.
Hamilton: Dopamine to credit cards. Looking at it this way, dopamine in our brain triggers a sense of pleasure, and we experience that during shopping...the shopping high...or even the [anticipation] of buying something. That's why when you're shopping for a new TV, or shopping for a new purse or whatever, the actual process of going through buying it triggers dopamine. Then once you actually get it, I'm sure some people have brought it home and said, "OK. This is really nice. I have it now," and the high isn't there as much.
Hamilton: And that's what happens. That's the chemical reaction [that takes] place in our brains. And why that matters for credit cards is credit cards are super convenient. You just take it out of your pocket, pay for [something], and you don't have to worry about the painful effects of actually paying for [something] until the bill comes due.
Hamilton: It's a recipe for disaster, and if you look at it, there are actionable steps you can take to combat essentially what's already happening in our brain, naturally, and will for thousands of years going forth. It's just ingrained in us.
So, first off, just be aware that it does happen, because if you ever see yourself in a situation where you're saying, "OK, maybe I'm experiencing this shopper's high when I'm window shopping, or so forth, and I can't afford it," just be aware that those effects may be at play. It is something definitely worthwhile to pay attention to.
The second one is just follow a shopping list. For my personal finances, every quarter, I outline some of the big purchases that may be coming up. Get a new car or a new TV. Heck, who knows.
Douglass: A new computer.
Hamilton: A new computer, or anything like that. Budgeting for those numbers and seeing which ones I can afford and which I can't. And over the quarter -- I do it about once a month -- is checking in and saying, "OK, I've got this one paid. Am I keeping track?" Some people do it for grocery shopping, but bigger impacts can be made for those large purchases, because missing the mark there is really where you're going to be impacted on your finances.
Douglass: That makes total sense. Let's also talk about setting balance notifications. You've got this budget. You can talk to your credit card company and have them notify you when you're spending beyond that budget, which is a great way to make sure that you aren't overspending...or if you realize you are, you can course correct quickly.
Hamilton: Yes, there are a number of options out there if you look [for them]. You can go through your credit card company online and set a threshold limit. When you reach that balance every month, you'll get notified via text or by email. But there's also a good number of various finance applications that can track your spending. What's important is it just insures that [you meet your budget and combat what's already taking place in your brain because of dopamine].
Douglass: Totally. And then finally, of course, paying off your balances monthly, [and] if possible, biweekly, because that means that you are not spending more than you can afford on a paycheck-by-paycheck basis.
Hamilton: I really like the biweekly method -- not so much that it does anything to your credit, but it gets you in the routine of spending what you can afford.
Hamilton: Because if you're spending every two weeks and paying it off every two weeks, you're matching up with the cash that's in the bank, and that way you're not overspending. Overextending yourself and getting yourself into debt. So it is a really important thing to focus on that seems small, but the actual routine of it gets you in the process of, once again, battling dopamine, getting rid of that shopper's high, and keeping to your budget.
Douglass: We've got a lot more information about how to keep to a budget, how to think about debt, and how to use credit cards effectively at fool.com/credit-cards. We've got copies of our credit card guides there for free and our picks for the best credit cards of 2017 also for free.
Hamilton: So many freebies.
Douglass: Yeah. Everything.
Hamilton: We're giving away the house.
Douglass: It's a fire sale, except it's free. We've got all kinds of information there and credit cards for a lot of different walks of life. Whether you've got excellent credit, good credit. You're looking for a transfer balance card. A cash-back card. A travel card. We've got all that information there.
This is really your opportunity to take control and make sure that you're beating dopamine, and we want to be here to help. So again, check us out. Fool.com/credit-cards. Nathan, thanks much.
Hamilton: Absolutely. Thank you.