Next time you give your credit card some exercise, ask yourself if you're behaving logically. You're probably not.
Credit cards are a fact of life for most Kiwis. The trouble with credit cards is that they skew the way we spend. Psychologists have found that we process money differently according to how we receive it or how we spend it and credit cards are one of the most dangerous weapons in our financial arsenal.
Our behaviour with credit cards puzzles psychologists, marketers and other researchers. If we walk into a shop with a credit card we're likely to spend more than if we had to part with cash.
Academics Priya Raghubir and Joydeep Srivastava from New York and Maryland universities studied the specific mechanisms behind consumer spending according to payment mode and found that credit is treated as Monopoly money by consumers while spending cash reinforced the pain of paying.
In their study, Raghubir and Srivastava asked participants to estimate how much they would spend on a meal of Cajun food with every last mouth-watering detail described. Those wielding credit cards spent more than those spending cash for the same meal.
The reason we are willing to pay more using our cards, behavioural economists think, is that we can separate the purchase decision and the actual payment. Even the physical differences between cash and plastic skew our decisions. The spending on each is assigned to a different mental account - allowing consumers to fool themselves.
Even when the participants in Raghubir and Srivastava's studies were given the same amount of money, but some in cash and some as gift cards - similar to our Prezzy Cards - those with the cash spent less. They felt the spending more acutely.
Consumers, they said, treated credit cards and other non-legal tender as play money, which led to overspending.
"The outflow of money is very vivid when individuals use legal tender such as cash making it painful to part with," they said. "In contrast, any payment mode that makes the outflow of money less vivid, and thus less painful, reduces the psychological barrier to spend."
They added that if the pain of paying increased with the transparency of payment mode, cash payments were more likely to be used for justifiable necessities and less likely to be used for frivolous luxuries.
Paul Harrison, senior lecturer at Melbourne's Deakin Business School, says credit seems more psychologically distant from the transactional experience than cash and requires more work by the brain to form a defensive attitude. He says other research shows those who acquire credit and go into debt may not understand fully the implications of their financial behaviour.
It's not surprising, therefore, that budget advisers recommend people ditch their plastic and spend cash only. The connection between earning the money and having none at the end of the week sinks in more effectively when spending cash.
Over time, since the introduction of credit cards, there has been a change in the way consumers view their cards, credit limits and spending.
Forty years later, we are driven to use credit cards thanks not just to the credit available or the convenience of paying with plastic, but by interest-free periods, loyalty points and, of course, the ability to buy what we otherwise couldn't afford, say Massey University College of Business academics Mark Lockhart, Claire Matthews and David Tripe.
No longer are credit cards just used for utilitarian purposes. They've become a device for hedonistic consumption.
Many researchers have commented that consumers no longer view their outstanding balances as debt. Instead, they see it as future income that they are spending today.
Lisa McNeill, director of the international business programme at Otago University's marketing department, interviewed young people who had recently left home and found many believed the credit available to them was "free money".
They don't see credit as dipping into debt as older generations might.
In a recent paper for the International Journal of Consumer Studies McNeill commented that Gen Y was born into a society that reinforces the self through having, and had been encouraged to consume since childhood.
As "Jane", one of McNeill's recent home leaver interviewees, said: "It [debt] doesn't worry me at this stage. I'd rather live comfortably now and buy the things I want, and have a larger debt, than have a smaller debt and have no spending money."
Now that most people have credit cards their use has become normalised, says McNeill, as has the idea of carrying a credit card balance. "They see [their credit card limits] as their money. It enables them to add to their lifestyle."
Interestingly many tertiary institutions may lose nearly as many students to credit card debt as they do to academic failure.
Our behaviour also changes according to our credit limit. The higher the limit the more we're fooled into spending.
In a paper for his masters' degree at Massey University, Norbert Wong discussed the transformation of credit cards from a preferred payment method in the early days for travellers to an everyday means of payment. Wong found that spending decisions changed when the credit card limit was increased.
The mistake consumers make in understanding their credit card limits is that they're not necessarily based on their earning potential - rather a calculated risk by the bank over how much profit it believes it can make from customers' debt. The more debt the more profit for the bank.
What's more, researchers Dilip Soman and Amar Cheema found people were unable to value their future incomes correctly.
The problem with the "spend now and pay the credit card debt off later" approach is that when the increased income does materialise there may be increased expenses to match, such as mortgages, child expenses and so on.
And once someone Passes Go and has their first credit card they become umbilically attached to it. The banks then gradually increase the consumer's credit limit, encouraging them to buy luxuries as if they were necessities.
In 2008 Harrison studied unsolicited credit card limit-increase offers by Australian banks. He found that these letters were presented as marketing and promotional tools urging the consumer to increase their "limit" not their "debt".
He found banks manipulated customers psychologically with these marketing letters. They used bold type, colours and large font for the "positive" words and phrases such as "you deserve the privileges of gold", "enjoy gold class travel benefits" and "take advantage of this golden opportunity".
Even where there were warnings in small type, the language was positive. For example, one letter repeated the word "flexibility" four times in the "warning" section of the letter and none put the word "debt" in bold type.
It is astounding how much thought goes into these letters. Harrison found that because the letters were signed by bank managers and directors, consumers were likely to assume experts had analysed their financial situation and had checked their ability to manage the increase.
"There should be no doubt that banks and credit providers use psychological manipulations to create an environment where certain customers are convinced, often against their better interests, to accept an unsolicited credit card limit-increase offer," wrote Harrison.
"At best, we can assume that the financial providers are misguided in their use of the warnings; at worst, the assumption would have to be that they are being disingenuous to their customers."
Credit card behaviour is affected by attitudinal factors, psychological factors, demographic and environmental factors and more. What's more, some of us have an internal locus of control and see our indebtedness or lack thereof as something we're in control of.
Those people whose locus of control is external may feel that there is nothing they can do to keep control of their debt and that any financial gains they have are because of luck. And present-biased individuals are more likely to have credit card debt.
The more consumers know about their behaviour the more in control they can be of their financial destiny.