A reader asked: Should I get a cashback card or one that gives you rewards? Or is a 0% on purchase card better? I will be able to repay in full most months I hope. The answer depends on what you want to use the card for... and if you really would be able to pay it in full every month. When is a cashback card better? If you repay the credit card bill in full every month then a cashback card … [Read more...]
The psychology of debt
Advertisers spend a lot of time and money working out how to persuade you to spend lots of money - that may well be how you got into debt in the first place! If you find out a bit about how your mind works, it may help you spot the mental traps that stop you from getting out of debt.
Optimism bias, the planning fallacy & debt advice
Research shows that most people underestimate the chance of a negative event and overestimate the chance of a positive event happening to them. This is called Optimism bias as it results in us having an unrealistically optimistic view of the future. For example: although about half of Western marriages end in divorce, few people getting married think it may happen to them; and we … [Read more...]
Sales bargains – 7 top tips avoiding the bad buys!
How do you spot the real bargains and avoid buying things you will later regret? The human brain is very good at processing lots of information fast by grabbing hold of important facts early on and letting them dominate decisions. That was perfect when we were out hunting for food and living in caves, but in a shopping mall or online it can go badly wrong! Lots of shouty Sale signs and money … [Read more...]
Buy Now Pay Later – why it often goes badly wrong
Buy Now Pay Later (BNPL) and other deals promising no interest sound so appealing. And so sensible if you are short of money. But very often you end up being charged large amounts of interest. The retailers offering these "bargains" know this happens and that they will make a lot of money from them So what goes wrong? Here are three things to look out for if you see one of these … [Read more...]
Overdrafts – a hard type of debt to clear
Do you think you will never be able to get free from your overdraft? You aren't alone. Overdrafts can be the hardest sort of debt to pay off. Even authorised overdrafts aren't cheap (once you stop being a student) and unauthorised overdrafts are very expensive. Overdrafts are very common. The FCA (who regulates the banks) says: 37% of people use an arranged overdraft each year; 25% … [Read more...]
Have you told people about your debts?
Talking about your debts can be hard. You might feel it’s nobody’s business but your own and you just want to sort it out yourself, rather than reaching out to other people. Or you may not want to explain how your debts got so large in the first place - perhaps feeling embarrassed about it. But that’s not the case for everyone. Perhaps talking it through, perhaps with just one person, has … [Read more...]
Scarcity – why people in debt need a breathing space
I recently read Scarcity: Why having too little means so much by Sendhil Mullainathan and Eldar Shafir. Since then I have been recommending it to friends in the debt advice world. I think Scarcity is a very interesting read for anyone interested in personal debt advice and policy in Britain. Many of its arguments are directly applicable to the idea of introducing a breathing space for debt that … [Read more...]
How can an experiment help with your debts?
I'm interested in the psychology of debt - what makes it harder or easier to tackle a debt problem. I think you may be able to make use of the Hawthorne Effect to help you clear your debts. Never heard of it? Read on! The Hawthorne Effect is the tendency for humans to change their behaviour simply because they are being studied. It was named after the factory where it was first noticed 90 … [Read more...]
Three mind tricks to help clear debt
Loyalty cards encourage customers to come back for their next coffee, pizza or supermarket shop. If you are trying to get rid of problem debt, then you need to beware of being enticed to overspend your budget, that's obvious! But here I want to look at some of reasons why companies use reward programs. Exploring the psychology involved reveals three factors which could also help you to get out … [Read more...]
Are you being tricked into debt by your own mind?
Have you heard of "present bias"? It's not wanting a jumper for your birthday rather than a bottle of wine, it's a behavioural economics term for a self-delusion that everyone suffers from to some extent. It affects many areas of life and one of the most important is making poor decisions about money - present bias makes it easy to get into debt and much harder to climb out. All too often we … [Read more...]