The American Mosquito Control Association declares, “Mosquitoes cause more human suffering than any other organism.” Wikipedia quantifies this suffering, stating “Nearly 700 million people get a mosquito borne illness each year resulting in greater than one million deaths.”
Those who escape the worst consequences of mosquitoes still don’t get off unscathed. Mosquitoes have ruined countless outdoor activities and all of us have suffered from the swollen and itchy skin caused by their bites.
But have you ever noticed how rarely you catch a mosquito in the act of biting you? If you knew what was happening you could minimize the damage and punish the culprit, but they are almost always long-gone by the time the itching and swelling alert you to the fact you have been bitten.
Why is that? How are mosquitoes able to stealthily land on you, penetrate your skin, find a blood vessel, and feast on your blood without you knowing it is happening?
The answer is magic spit. Before biting you the mosquito secretes some saliva onto your skin. This saliva contains a local anesthetic that numbs the area enough for the villain to complete its heist without you feeling anything. It is only later, after the despised critter has made its escape, that the pain, irritation, and possible sickness begin.
Credit Cards and the Pain of Spending
Credit cards have caused more fiscal suffering than any other financial instrument. In fact, you might say that credit cards are the mosquitos of the financial world.
Nerdwallet.com, using statistics released by the Federal Reserve, reports that, as of December 2014, Americans owed $882.6 billion in credit card debt for an average of $7,283 of debt per household. When you count only those households who carry credit card debt the average rises to $15,611.
How are credit cards able to do so much damage? Ironically, they work on the same principle as mosquitoes, but without the magic spit. Credit cards mask the immediate pain of spending, but, like mosquitoes, cause great pain and suffering later.
When we spend cash we immediately feel the pain of the purchase. This pain alerts us to monitor the situation and minimize the damage. It is like catching the mosquito in the act of biting us.
Credit card purchases, on the other hand, anesthetize us to the pain of parting with our money. Not feeling the pain of the purchase causes us to spend more than we otherwise would, leading to greater pain in the future.
This was illustrated in a study of MBA students conducted by Drazen Prelec and Duncan Simester. The students were given the opportunity to bid on a pair of tickets to a sold out sporting event. Some were told they had to pay in cash by the next day while others were told they could pay using a credit card.
Those spending cash bid an average of $28 for the tickets, while those using credit were willing to spend more than double that amount, bidding an average of $60. This tendency to spend more when we use credit cards is one explanation for the huge credit card debt problem in America.
Credit Card Amnesia
Credit cards have another power that not even mosquitos can match. Not only do credit cards anesthetize us to the pain of spending, they also cause financial amnesia. Have you ever been surprised when you opened your credit card bill at how much you owed? If so, you are not alone.
In a study conducted by Dilip Soman, 30 people were asked to estimate how much they owed on their credit card prior to opening their monthly bill. All 30 of them underestimated how much they owed, and not just by a little. The average estimate was 30% lower than the actual bill.
The power of credit cards to anesthetize us from the pain of a purchase, and to cause amnesia regarding the extent of our spending, is a dangerous combination. It is the reason credit card use can be harmful to your financial plan even if you avoid interest expense by faithfully paying the balance every month.
The implications are clear. To stay on your spending plan avoid credit card use altogether, or only use them with extreme caution. Let the pain of the purchase work in your favor. Catch the mosquito while it is biting you and limit the damage.