Credit card use and payment defaulting on the rise: Study

  • Notes misuse fuels compulsive purchasing, unrealistic optimism, debt, financial burden, stress 

By Ruwan Laknath Jayakody 


In Sri Lanka, at present, the rates of both credit card usage and defaulting on credit card payments are on the rise, a local study found. The study also revealed that the improper management or inappropriate use of credit card based spending resulted in changes to the credit card holder’s consumption patterns and associated behaviour, fuelled compulsive purchasing and unrealistic optimism, which in turn led to unmanageable levels of credit card debt, related economic/financial burdens, and ultimately stress. Additionally, the researchers urged that in addition to compulsive purchasing and unrealistic optimism, other factors that impact on credit card use, debt and related stress such as social influences, situational factors, depression, guilt and familial conflict, should be studied. 

These findings were made by G.M.R. Rodrigo and B.S. Galdolage (both attached to the Sri Jayewardenepura University) in a research conducted in the Western Province titled “Unrealistic Optimism, Compulsive Purchasing and Debt Stress among Credit Card Users in Sri Lanka” which was published in the Kelaniya University’s Sri Lanka Journal of Marketing’s Volume Seven – 25th Anniversary Special Edition, on 10 March this year. 

For the purpose of the study, unrealistic optimism denotes, as defined by J.A. Shepperd, W.M.O. Klein, E.A. Waters and N.D. Weinstein’s “Taking stock of unrealistic optimism”, J. Shepperd, J. Ouellette and J. Fernandez’s “Abandoning unrealistic optimism: Performance estimates and the temporal proximity of self relevant feedback” and T. Calderon’s “Predictive properties of analysts’ forecasts of corporate earnings”, persons who assume that the future will be more favourable and unduly expect favourable outcomes when compared to other social groups. It also refers to the following premises: an unjustified expectation that a particular result will be more desirable than what an objective standard suggests, and the erroneous assumption that one’s results will be more favourable than one’s peers’ results. As per L.A. Jansen, P.S. Appelbaum, W.M.P. Klein, N.D. Weinstein, W. Cook, J.S. Fogel and D.P. Sulmasy’s “Unrealistic optimism in early phase oncology trials” and N. Weinstein’s “Smoking: Risk, perception and policy”, absolute and comparative unrealistic optimism can have a major impact on people’s decision making. 

In the context of this study, compulsive buying is outlined by M. Moore in “Compulsive Shopping Disorder: Is It Real and Can It be Measured?” and H. Dittmar’s “The Costs of Consumer Culture and the ‘Cage Within’: The Impact of the Material ‘Good Life’ and ‘Body Perfect Ideals on Individuals identity and Well Being”, as the frequent preoccupation with buying or the desire to buy, a preoccupation and incentive that is deemed irresistible, intrusive and senseless, to buy goods and services even if they are aware of the adverse effects of such chronic, repetitive behaviours on their personal, social, and financial situation, due in part as a reaction to negative feelings and events or anxiety or aspirations. The latter is noted in “Credit Card Possession and Other Payment Systems; Use Patterns among Asian and Hispanic Consumers” by N. Delener and H. Katzenstein. Further, H.J. Park and L.D. Burns’s “Fashion Orientation, Credit Card Use, and Compulsive Buying”, W.D. Hoyer and D.J. MacInnis’s “The importance of customer satisfaction in relation to customer loyalty and retention” and J.A. Roberts’s “Compulsive buying among college students: an investigation of its antecedents, consequences, and implications for public policy” notes that using credit cards makes the holder likely to purchase more and make purchases without thinking about one’s needs, which is in turn exploited by financial institutions which push clients to pay only the minimum due amount, and pay the dues with higher interest rates. Moreover, S. Yang, L. Markoczy and M. Qi’s “Unrealistic optimism in consumer credit” and H. Tokunaga’s “The use and abuse of consumer credit: Application of psychological theory and research” observes that unrealistic optimism about potential borrowing is also associated with the use of credit cards while credit card users with credit-related problems who viewed money as a source of power and prestige, take fewer steps to retain their money, display higher risk taking and sensation seeking tendencies, and as a result, experience anxiety about financial matters. 

Credit (seller transfers assets to a buyer who agrees to pay later) cards which are a popular and frequently used payment instrument that is a substitute for cash purchases, whilst providing a degree of financial security and flexibility, can create financial difficulties when misused, with indebtedness, as noted in T. Durkin’s “Credit cards: Use and Consumer Attitudes, 1979-2000”, being one such issue. 

According to the Central Bank of Sri Lanka’s (CBSL) “Payment Bulletin” for the “First Quarter” of 2019, there were 17 licensed organisations engaging in the credit card business, including 14 commercial banks and three finance companies. During the 2015 and 2019 period, the CBSL recorded a growth in the demand for credit cards as noted in the issuance of such activated cards with the majority being globally accepted cards as opposed to only locally accepted ones, and an increase in both the volume and value of transactions using credit cards. The CBSL further reported that from January 2019 to March 2019, a total of 78,201 credit cards were issued, recording a percentage shift from 13.3% in 2018 to 23% in 2019. Credit card based expenditure had risen, as per the CBSL, by 22% year on year to Rs. 63 billion during the first quarter of 2019 against Rs. 51.6 billion in 2018. 

Problems arise when, as Rodrigo and Galdolage point out, credit card holders make daily payments without waiting for the next salary, a situation which in turn leads to arrears in payments. Pertaining to this scenario, the CBSL reported that in the first quarter of 2019, maximum defaulting for 90 or more days in terms of payment arrears was seen in the case of 118,905 cards, with the percentage change in defaulted credit cards increasing from 15.8% in the first quarter of 2018 to 16.1% in first quarter of 2019. 

As explained by S. Kossman in “What Is Credit Card Debt and How Can You Avoid It?”, credit card debt is a form of revolving debt where the cardholders can keep on borrowing on a monthly basis, and therefore, as long as they are paying back sufficient amounts, they never owe more than a set limit. Credit card debt, Kossman further explains, if not repaid, can also seriously damage the holder’s credit score and history. 

On a related note, C.R. Hayhoe, L.J. Leach, P.R. Turner, M.J. Bruin and F.C. Lawrence’s “Differences in spending habits and credit use of college students” found that an effective credit disposition, financial practices, and financial stressors are associated with maintaining a balance as far as credit cards are concerned. 

That there is a connection between credit card debt and indebtedness, and stress, has been noted by J. Drentea in “Age, debt and anxiety” and P. Drentea and J.R. Reynolds’s “Health effects of indebtedness: a systematic review”, where it was found that higher levels of stress and persistent anxiety are directly linked to credit card debt, with J. Norvilitis observing in “Task performance and response to frustration in children with attention deficit hyperactivity disorder” that such psychological distress and trauma and both physical and mental ill health, all of which reduce personal and familial well being, can morph into, in the worst case scenario, impaired mental health and problems related to social functioning, and rarely suicide as elaborated in “The Effects of Minimum Wages on Employment: Theory and Evidence from Britain” by A. Manning, R. Dickens and S. Machin. 

The study was a quantitative research survey carried out using a self administered questionnaire that was distributed among 350 credit card users in the Western Province, who were chosen based on the convenience sampling method, with a total of 312 questionnaires that were returned as complete. 

The results revealed that – combined together, both unrealistic optimism and compulsive purchasing amounted to 45% of the debt stress; unrealistic optimism and compulsive purchasing have a moderately positive significant impact on debt stress; and a moderately positive relationship was found between unrealistic optimism and compulsive purchasing. 

Analysing the findings in light of the available literature, Yang et al., mention that consumers with unrealistic optimism regarding credit card payments take bad decisions, as owing to their wishful thinking on the matter, they tend to use their cards continuously, thereby exceeding their financial capacities and limits and incurring losses, the latter phenomenon which has been identified by H.J. Hassinger, E.M. Semenchuk and W.H. O’Brien in “Appraisal and coping response to pain and stress in migraine headache sufferers”. This situation in turn leads to, as noted in L.M. Koran, R.J. Faber, E. Aboujaoude, M.D. Large and R.T. Serpe’s “Estimated prevalence of compulsive buying behaviour in the United States”, consumers not managing their consumption, ultimately resulting in either the practice of buying what they necessarily want or buying high volumes of what they necessarily want but in quantities that are more than is required or buying unnecessary things. The end result is however, debt, that too in large amounts, and financial difficulties (J.A. Roberts and E. Jones’s “Money Attitudes, Credit Card Use, and Compulsive Buying Among American College Students”, and T.C. O’Guinn and R.J. Faber’s “Compulsive Buying: A Phenomenological Exploration”). 

Thus, Rodrigo and Galdolage emphasised that the prudent and correct use of a credit card reduces individual liquidity risk and provides additional resources while if credit card expenditures are unconscious and over the budgetary limits, it may cause excessive debt, in turn creating financial difficulties or even leading to bankruptcy. Rodrigo and Galdolage, therefore, recommended that individuals be aware of the financial regulations governing their credit cards and financial capacities. 

Therefore, Rodrigo and Galdolage recommended that banks and financial institutions that are involved in the credit card business seek to better understand their customers.