Credit Card Debt And Happiness

“OK. Don't panic. Don't panic. It's only a VISA bill. It's a piece of paper; a few numbers. I mean, just how scary can a few numbers be?” If you echo Rebecca Bloomwood’s sentiments you are probably one of many Australians contributing to our nation’s $49.9 billion credit card debt.

For those of you less familiar with Sophie Kinsella’s ‘Confessions of a Shopaholic’ heroine, each month ‘Becky’ goes through the heart-stopping, chest-clutching routine of recalling every poorly thought out purchase, from the expensive night out she ‘just had to’ go on, and the colleague’s gifts she ‘just had to’ chip in for to the 1000 thread count sheet set she ‘just had to’ get when it was on sale.

Does that sound like you? Well, you are not alone. Research has shown that around 50% of Australians use their credit cards for everyday purchases like food, bills and fuel. Around 16% use their cards for shopping online, and 14% have one for emergency purchases. These figures would not be quite so troubling if they were not coupled with the fact that Aussie credit card debt has accrued around $35 billon in interest. And unfortunately for us, it is not only affecting our hip pockets.

Research investigating the psychological impact of debt has revealed a link between those with credit card debt and lower levels of subjective well-being1. Just like Becky Bloomwood, those of us with unmanageable debts are more likely to develop anxiety-related problems and depression2. Additionally, needing to borrow money mid-week increases the chances of being unhappy3. Interestingly, the evidence suggests this may not be true of all kinds of debt. Large secure debts, such as a mortgage or debts for investments have not been shown to impact life satisfaction in a negative way. So what is the difference with credit cards and why do they have the power to strip us of our optimism in one fell swoop?

Perhaps it has to do with the lack of knowledge around credit cards, leading to increased uncertainty and the dreaded feeling of ‘extreme bill apprehension’. Australian research has shown that 40% of us are unaware of our credit card’s interest rate. This is a big factor which can increase the ‘shock status’ upon opening a bill. Credit cards can vary anywhere from around 9% to 25% interest for some store cards. Many people may have obtained cards on a promotional or introductory interest rate. These expire after a period of time (outlined in the ‘Terms of Agreement’) so what you were once paying in interest may not necessarily be the same as the rate you are paying now.

Next - many credit card holders are not aware of the interest free period offered for their purchases. Failing to pay your balance in full by the end of this period will see your credit card bill increase exponentially. Credit card holders may also be unaware that any cash withdrawals from their credit account will result in immediate accruing of interest, regardless of the interest free period offered on purchases. Definitely a cause for anxiety!

On to Balance Transfers. You know the old adage: Nothing in life comes for free? Well, it is true of balance transfers too. Balance transfers are usually offered by rival credit card companies to encourage you to switch to their product. They will offer a reduced interest rate for a period of six months to sometimes a year. But beware- there are often hidden fees or higher-than-usual interest rates waiting just around the corner.

That brings me to my next point, fees, fees and more fees! Depending on your credit card, any number of fees may be applicable. Many have an annual fee (usually the cards with the most exciting reward programs have the highest annual fees), over-limit fees (when you have spent more than your agreed credit limit), late fees (for missing your minimum payments), and currency conversion fees (for using your credit card when overseas). With all of these fees compounding the credit card debt you have already managed to rack up on your own, it is no wonder people with debt are less happy!

So what can you do to protect your emotional well-being and decrease your chances of hyperventilation from ‘extreme bill apprehension’? Well Becky had some advice for us- either cut back or make more money. Or in Becky’s case, meet an attractive heir to a media conglomerate. That’s fiction for you! For those of us in the real world, meeting an unnaturally wealthy prospective partner is unlikely. Making more money sounds like an excellent way to keep up with the Jones’ but is probably not feasible with your already hectic schedule. Cutting back sounds great in theory but you may have trouble adjusting your spending all at once. Plus- we’re not just trying to reduce debt here, our goal was to avoid unhappiness too, right?

So how about being smarter with our cards? Discovering your interest rates, your fees and your interest-free periods sounds like a tedious way to spend an afternoon, but it is sure to pay handsome dividends. Try checking out our article 5 Ways To Reduce Credit Card Debt for a good place to start. The important thing to recognise is there are a lot of strategies to help you manage your credit card debt- so don’t allow yourself to become emotionally disturbed by your financial situation- any proactive action will help!

And a last word from Ms Coco Chanel: “The best things in life are free; the second best are very expensive”. There is no denying it, shopping does make us happier, but shopping debt free makes us happiest of all.

1Brown, S., Taylor, K.B. and Wheatley Price, S. (2005). Debt and distress: Evaluating the psychological cost of credit. Journal of Economic Psychology, 26, 642-666.

2Skapinakis, P., Weich, S., Lewis, G., Singleton, N. and Araya, R. (2006). Socio-economic position and common mental disorders. Longitudinal study in the general population in the UK. British Journal of Psychiatry, 189, 109–117.

3Borooah, V. K. (2005). How to assess happiness? A tale of three measures. Applied Economics Letters, 12, 191–194.

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