While I was home for the holidays, I ran into two friends who had credit card debt, but when I asked, they both had enough money in savings accounts to pay off their debt. I suggested that they pay it off: even the highest yield savings accounts these days might pay about 4 percent monthly, whereas it costs more like 12 percent to revolve credit card debt every month.
Richard Thaler and Cass Sunstein, the authors of the book I’m reading, “Nudge: Improving Decisions About Health, Wealth, and Happiness,” say this is a form of mental accounting. You may that savings fin a special account dedicated for something else, say, a downpayment on a house, and don’t think to use it for other purposes, like paying off the credit card. The sanctity of these special accounts may lead to this kind of behavior.
This seems to be just one example of how our use of financial services is linked to our own biases and behaviors, even when the best outcome — being free off credit card debt — could easily be done.
I have no doubt that financial institutions, and particularly credit card issuers, use this to their advantage: we underestimate the number of times we’ll make a tiny mistake like paying late or going over the limit. And banks charge a $39 fee for each of these mistakes.
In my opinion, each of these “tiny mistakes” is akin to forgetting your mother’s birthday or accidentally leaving your keys in the fridge? What if credit card CEOs were charged $39 every time they forgot which day the garbage man comes?
