Monday, November 9, 2009

The Common Misconception About Credit Cards Part 1

Many websites, including the one linked in the title, advocate the use of credit cards to rack up rewards as a way of saving money (see number 1 in the link).  I would like to propose that this claim is false.  Credit cards do not help you gain monetarily, in fact the opposite occurs.  This occurs for two reasons: 1)the psychological effects of spending on credit 2)the credit card industry itself.  Part 1 will begin the discussion about the psychological effects that occur when consumers decide to use their credit card at the point of purchase.  

Don't Be Fooled
I know it is easy to be enticed by the millions of rewards credit cards that exist.  I mean, earning 4% cash back while purchasing groceries does sound exhilarating.  Little did you know that when you are handing over that piece of plastic, your mind is working in mysterious ways. 

The Psychology of Spending
Various studies, such as the "The Realities of Spending" by Greg Davies and "Effects of Payment Mechanism on Spending Behavior: The Role of Rehearsal and Immediacy of Payments" by Dilip Soman have proven the psychological effects that occur when we whip out the credit card.  When using a CC our mind tends to group transactions.  For example, adding a $40 charge to a $345 credit card bill makes the $40 seem smaller, which increases spending. CC spending also results in dissociation of payments from consumption, as the payment occurs much later than at the point of sale (thre is a month-long payment cycle).  Thinking about the cost of a purchase while consuming it can lower the pleasure gained from the purchase, so with credit cards you don't feel the "pain of paying" and there is a weaker averisve impact. This increases the likelihood of making additional purchases as you aren't "hurt" by the purchase. Lastly, when using a credit card our mind decouples the payment from the actual transaction. You buy now and pay later so the act of purchasing and paying become distinct from one another in your mind.  Credit cards cause this because there is a period of time between when you purchase the item and when you pay the bill.  Also there is a high amount of diversity in the types of of transctions on a credit card, so this reduces coupling.  If you buy clothes, gas, food and other things on your card, it will result in a reduction of coupling for all purchases.

All of these pscyhological effects result in increased spending. Not convinced? I bet you will be after my next post. 

To Hat or Not to Hat

Faux fur is something I never thought I would want to wear.  This fall I am found myself yearning for a faux fur hat, however my fear of looking like a total idiot is stopping me at this point.  I'm sure most of you have had this happen in your life... you want to purchase and wear the daring piece of the season but you cannot bring yourself to make the purchase, or you do make the purchase and the item sits in your closet for the rest of the season unworn. But hey, at least you didn't humiliate yourself right?  This post is my plea for women to be able to make that purchase and wear that item with confidence. I hope the same happens for me. I will keep you posted!  

Friday, November 6, 2009

What Is the Purpose of This Blog?

After graduating from university and moving to a new city I've decided its time to conquer some things in my life. Currently I am partly fashionable, partly frugal and partly in control of my personal finances. I want to be great at all three things. This blog will chronicle the things I learn on a daily basis about affordable fashion, frugality and getting in full control of my money. My hope is that other people are in the same position, sort of mediocre at these things, and I will help and inspire others to take control of these things and become experts of the three Fs.

I am not fully unqualified... I do attempt to make an effort to look fashionable on a daily basis however usually find myself making impulse purchases of which I am not happy with. I also never take advantage of great sales going on at my favourite stores (as you will learn, they are H&M, Urban Outiftters and Zara). I would prefer to shop at expensive stores, however at this point in my life I cannot afford such luxuries. I also received a Bachelors of Commerce from U of T where I specialized in finance and economics, so I am also not completely incompetent in the finance field. However, I've realized that studying corporate finance in a classroom setting and dealing with personal finances on an everyday basis are two completely different things, so I hope to apply any knowledge I have to this field so I can help myself and others to gain control of their own monetary situations. I do not have a mortgage to take care of or any car payments, my main financial obligations consist of rent, credit card debt, clothing, food and my cat. I'm hoping those that learn from this blog have similar financial situations.

My hope for this blog is to include coupons, great fashion ideas, locate and share amazing personal finance blogs, write my own finance blogs and offer great life advice. I will do all the work and you get to just come along for the ride.