Are you mentally ready for your first credit card? Ask yourself these 3 questions before you apply.

This may seem obvious, but personal finance is called personal finance for a reason. It combines your personal life –your thoughts, emotions, habits, among other things, with your finances. Unfortunately, people tend to overlook the personal aspect when making financial decisions, and credit cards are no different. These questions will help assess your traits, and if you are mentally prepared to apply.

Do you struggle with procrastination?

Be honest with yourself. We all know our tendencies. If you know yourself as someone that tends to put important tasks off until the last minute (i.e. schoolwork, work projects etc.), a monthly credit card payment also seem like something you can postpone. Sure, one missed payment will likely not do much harm to your credit. However, a pattern of missed payments can not only damage your credit quickly, but it can also result in expensive interest charges.

For those with procrastination issues, setting up automatic payments on a credit card is a solid option. It is recommended that you set the automatic payment to pay off the balance in full. Keep in mind though that automatic payments can draw overdraft fees from you bank if your account is lacking funds (this is a more relevant to those that link a checking account). So a word of advice is to check both your credit card balance and its liked bank account before your automatic payment transfer date to ensure you have the funds available. Overdraft fees suck!

If automatic payments don’t suit you, another option is to make a monthly reminder on your phone or planner to pay your balance off in full before your due date.

Do you have impulsivity issues or poor decision making skills?

Impulsivity is a trait that will be more easily exploited when you have an easy method of payment like that of a credit card. Credit cards are extremely convenient, as they provide payment regardless of how much money you have in your bank account. This is alone is enough to entice many people to spend more money then they normally would. Yet, the problem is even more intensified if impulsivity issues are a factor.

A way of helping manage impulse purchases (and managing finances in general) is to use a budget so that you will be aware of how much you have left to spend in a certain category. This limits (or at least makes you aware) of your spending habits. The simplest way to budget is the old fashioned way, via a paper and pencil. However, this method takes time and a lot of effort to maintain, as you have to log purchases manually. An easier method is by linking your credit card and other accounts to a personal finance software. There are a variety to choose from, but Personal Capital ranks towards the top because of its free budgeting tool, seamless account integration, and investing capabilities.

Are you aware of how credit cards affect emotional response mechanisms ?

Yeah, It may sound crazy, but credit cards can pull some weird mind tricks on your brain if you’re not careful. (Yes, kinda like Obi-wan).

Credit cards have the effect of numbing the negative emotional response to spending money. This is primarily because of two reasons:

  • Delayed payments
  • Physical connection of cards vs. cash

Delayed payments can trick your brain into thinking that you’ll somehow be able to pay off debts later on, even when your payment due date is within a couple weeks. Your brain tends to think that you have more time then you actually do. A common thought among credit card users is “Well, I won’t have to pay this off till the end of the month, so whats the matter if spend a little extra.” This thought, although convincing at the time, can lead to a pattern of excess spending (and a higher risk of being unable to pay debts).

Our brain tends to like to physically hold unto things that are important to us. For example, when you lose your phone, you get worried and you feel at a loss. The same applies when you lose cash when spending it. Your body sees that the money has been taken away from you, triggering a negative emotional reaction, or a worrisome feeling. However, when you spend money using a credit card, the emotional response a lessened significantly because there is no physical loss (your card is returned).

Although credit cards may take advantage of the way our minds work, simply being mindful of these “tricks” is a good way to combat them. As previously mentioned, establishing a budget is another great method to control your credit card spending habits.

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