Unrealistic optimism about what we can pay back can lead to debt.
One of the traps that many people find themselves in when it comes to credit cards is unrealistic optimism. People fall into this trap easily when they overestimate their ability to pay off credit card bills in a timely fashion.
When one buys on credit, he or she rarely thinks that a time will come when it will be difficult to make the credit card payments.
“Most students perceived themselves as far more likely than their classmates to experience positive events such as getting a good job, drawing a good salary and owning a home, and as far less likely to experience negative events such as getting divorced, having cancer and being fired.”
The Human Connection, David G. Myers
Indeed, we think that — at some point in the future when we make more money — it will be easy to dispose of our debts. In the mean time, we buy on credit and make small, minimum payments.
Unrealistic optimism is one of the main reasons that debt starts to pile up. We keep waiting for the big break that will free us from debt or we think that we can handle the credit card payments on a large purchase. Unfortunately, most of us tend to forget that interest has to be paid. Interest changes the equation: it means that we have to pay more.
It is important to do your best to avoid unrealistic optimism when you are making purchases. Consider the original amount you will have to pay back, but factor in interest.
Also, realistically look at your budget and your credit card bill. If you cannot pay off a purchase within six months, do not buy it. Instead, save for it. It can be difficult to employ this self-discipline, but it is important. You need to be honest with yourself about your money situation to avoid getting into difficult-to-discharge credit card debt.
Next: Why We Get in Debt, Part 6: Keeping Up With the Joneses
Previous: Why We Get in Debt, Part 4: Procrastination
All posts in this series:
Why We Get in Debt, Part 1: Behavioral Economics and 5 Types of Apathy
Why We Get in Debt, Part 2: Lack of Self-control
Why We Get in Debt, Part 3: Cumulative Cost Neglect
Why We Get in Debt, Part 4: Procrastination
Why We Get in Debt, Part 5: Unrealistic Optimism
Why We Get in Debt, Part 6: Keeping Up with the Joneses
Why We Get in Debt, Part 7: Know Yourself and Your Limitations
