Amar Cheema knows his eyes get bigger than his wallet when it comes to computer purchases.
“I like to buy computers—that’s my weakness,” he says with a sheepish grin.
He also knows, however, that he will have to explain to his wife why they need yet another computer, and that tempers his impulse.
“Knowing that I would be discussing the expenditure with her essentially acts as a self-control mechanism, because I can justify it to myself more easily than I can to her,” says Cheema, a professor in the McIntire School of Commerce.
Justification—having an external check on what you purchase by having to explain it to a friend, parent or spouse—is one mechanism Cheema cites to nurture healthy spending habits. The tip comes from his extensive research into spending patterns in general and credit card use in particular.
Cheema knows from personal experience the ins and outs of credit cards. When he came to the U.S. in 1998 from India, he had no credit history in this country. To pay for grad school at the University of Colorado in Boulder, he relied on credit cards. He got his Ph.D., but he also accumulated high-interest debt.
Now he analyzes consumer patterns through factors such as decision points and transaction decoupling. Those research terms play into the following tips he provides for spending during the holidays—and beyond.
- Make a commitment: Set a limit on your spending in general and your credit cards in particular. “Someone who is trying to control their spending might say, for example, ‘I’m not going to spend more than $1,500 on my credit card in a month,’” Cheema says. “That will make it less likely that you will be tempted by a big-ticket item and go over your limit.”
- Don’t be fooled by time: Transaction decoupling, when the purchase is separated from the actual payment, makes it easy for you to lose track of accumulated expenditures. “With a credit card, you don’t know until 25 days after the purchase,” Cheema says. And often, credit card statements come on a different cycle than when many people pay their monthly bills—another form of decoupling. Using feedback (see below) can combat decoupling.
- Use feedback: Review statements, expenditures and charges routinely, weighing spending against income. Writing down each expenditure in a notebook or spreadsheet can help you categorize and manage spending. Some banks offer access to accounts using mobile phones. Cheema says some companies also allow customers to determine the billing cycle so they can review credit card statements when they are paying other monthly bills.
- Know your limits: Credit card limits can be illusory, particularly for younger consumers. “[They] have fewer experiences with credit cards, and thus typically treat their credit limit as a signal of their future earnings,” Cheema says in a study co-authored with Dilip Soman, a professor at the University of Toronto. The study found that participants with a $5,000 credit limit were more likely to spend than those with a $2,000 limit.
- Know the differences: How should you pay—credit card, debit card, check or cash? Cash means no bills later, but cards are often more convenient. Debit cards provide payment without debt, but there’s a risk of decoupling. Using credit cards wisely can help you build a good credit history, but abusing them risks compiling debt. Cheema suggests a tip for credit card users: Ask yourself, “Can I pay this off in three weeks?” If the answer is no, he says, “basically you’re taking out a loan with a 20 percent APR.”
- Know your options: There are alternatives to the high annual percentage rates of credit cards. Depending on the nature of the expenditure, Cheema suggests looking into a bank loan, asking the retailer for financing or negotiating for credit with a lower APR.
- Take a moment: Cooling-off periods can take the heat and emotion out of a decision, allowing you time to ponder the pros and cons of a purchase. One tactic is freezing a credit card into a block of ice. “This ensures that the consumer has access to credit in the case of a real emergency but cannot whip it out and use it quickly in response to a purchase impulse.”
- Plan (and save) ahead: “The best approach is what they used to call Christmas clubs,” Cheema says. “During the year, put away money, knowing that you will have more expenditures later and won’t have to fall back on high-interest loans. Essentially, this becomes a precommitment.” Some companies also are reviving layaway plans.