Barbara Kiviat in Time takes a look at the one aspect of credit card debt that no amount of government reform is going to fix: the human brain’s tendency to fail miserably when it comes to making decisions about spending.

There are piles of evidence that people are bad decision makers when it comes to how they use credit cards. Even when presented with full and fair information, they often make decisions that are not in their own economic best interest.

Here are three examples from the article:

• We’re not always good at picking the best teaser rate offer, because we fail to take into consideration the length of time of the special rate and the true likelihood that we’ll pay off the balance during that time.
• We don’t give penalty and other fees enough weight when choosing a card, again because we don’t seriously consider the possibility of paying late or going over the credit limit.
• We’re frequently willing to pay more if we pay by credit card. Kiviat writes, “In one experiment, Drazen Prelec and Duncan Simester of the Massachusetts Institute of Technology found that people were willing to pay twice as much for basketball tickets when they were using a credit card as opposed to paying cash.”

The bill before the Senate does try to address some of these psychological stumbling blocks, by requiring credit card providers to show customers how long it will take to pay off a debt, and how much interest it will cost, if they only pay the minimum amount.

Regardless of what happens on the provider side of the issue, the next time you’re shopping around for a credit card, it’s probably a good idea to be more pessimistic about your future than you normally would be, so that you don’t dismiss things like hidden fees, skyrocketing rates, and the possibility that some emergency will leave you carrying an unexpected balance.

“The Real Problem with Credit Cards: The Cardholders” [Yahoo] (Thanks to PewPew!)
(Photo: richardmasoner)

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