3 Psychological Pitfalls to Avoid When Choosing A Credit Card

As we progress in our personal finance journeys, we should not fall victim to becoming comfortable in the status quo. We detail three psychological pitfalls a lot of consumers fall into when it comes to credit cards and how you can prevent yourself from doing the same.


The human mind is one of the most fascinating subjects in the world. Our ability to learn, comprehend and invent complex concepts have helped us create the modern society filled with some amazing inventions like electricity, airplanes and self-driving cars. However, our minds also suffer from some simple but persistent biases that often lead us to suboptimal results.

According to a scientific study at Simon Fraser University in Canada, our subconscious nervous system is wired to be lazy to keep energy costs low. It’s actually quite like like Newton’s first law of physics: an object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force. Driven by this tendency, we repeatedly make bad decisions without the willpower to change our behaviour patterns, such as watching TV instead of exercising. This tendency is reinforced by our mental biases that work to simplify our decision processes.

While most of these “suboptimal” behaviours have long-term consequences, using a bad credit card can cost you quite literally thousands of dollars across your life time. Such a mistake can be very expensive given that you lose out on all the rich rewards that credit issuers offer all the while paying the high transaction fees that are implicitly included in the prices. To help you overcome these mental biases and avoid losing out economically, we have prepared the below three snippets on ways our brains trick us into using the wrong card and how you can avoid making such a mistake.

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1. Sunk-Cost Fallacy

Sunk cost is an economics term that describes lost investments that have already been made and can no longer be recuperated. The economics principle states that we should avoid pouring money into a project just because we have already poured a lot of resources into it. Instead, we should cut our losses and focus our resources on other more promising things.

However, the human mind often suffers from a bias called the sunk-cost fallacy, where we feel impulsed to invest more time and money on something just because we don’t want our previous investment to go to waste.

Related: Costly Investing Mistakes and How to Avoid Them

You can easily see how this can be a common problem affecting our everyday lives. Consider a situation where you have a credit card that earns air miles that can only be used for an airline you rarely fly with. However, you’ve already paid that S$196.20 annual fee for the year, so you feel like you should keep using the card.

This is a prime example of the sunk cost fallacy. Instead of throwing your money at a card to “get your money’s worth,” you could be using a different card that earns air miles that can actually be redeemed at airlines that you fly with. The annual fee is a sunk cost: no matter how you decide to spend your money going forward, you are never getting it back.

swiping credit card
Source: Unsplash

In order to avoid suffering from the sunk-cost fallacy, you should make decisions based on the cost and benefits from the present while disregarding your past losses. If you’re looking for more flexible rewards, try a cash back credit card with flat rate rewards on all your purchases. If you want to travel flexibly, consider a travel credit card with easily transferable miles and low foreign transaction fee.

Also, you could call your bank to ask them to either waive your annual fee or convert your old card to a no-annual-fee version. This can help you hold onto the earned-rewards for possible use in the future. If neither is an option, you should redeem your miles and cancel your account as soon as possible. Not doing so will only incur further losses in annual fees down the road for a card that you shouldn’t even be using in the first place.

Related: A Guide to Redeeming Miles From Credit Card Rewards in Singapore

2. Bias for the Status Quo

As we mentioned previously, our minds are wired to be lazy. We love maintaining status quo even when there is an obviously better option just because we don’t like to change. Status quo is comfortable. It’s good enough, and why make the effort to rock the boat? You might prefer the credit card you already have just because it’s in your wallet. It just takes too much effort to go look for another (better) one, apply for it, wait and replace our old card. How long does that take? 30 minutes? 1 hour? 4 hrs?

In order to overcome such a bias, you need to actually think through the pros and cons of a possible change. For instance, perhaps you are using a card that earns 8% cashback on groceries but only 2% on restaurant bills. The problem is that you hate cooking and always eat out. You can calculate how much you are losing out on cash rebates simply by calculating the amount of cash back you can earn on a different card given your monthly food expenditures.

We’ve done a sample calculation based on two hypothetical cards. Card A returns 8% on groceries and 2% on dining, while Card B returns 2% on groceries and 8% on dining. If you spend S$500 a month on dining and S$200 on groceries, you can earn S$18 more on cashback every month by using Card B. This difference can add up to a substantial amount equaling S$216 over the course of a year!

difference in cashback earned based on spending patterns

3. Regret aversion

Regret aversion refers to people’s tendency to fear making a mistake more than the consequences of inaction. This is because making a wrong move has consequences that are more easily understood than consequences of doing nothing. For example, it’s quite obvious that you can break your hand if you punch a wall; it’s more difficult to realise how much it’ll hurt when you are standing around without seeing a bike approaching at full speed.

This same mistake can happen with credit cards too. Maybe you are worried about not meeting the spending limit to qualify for a welcome bonus for a credit card. Maybe you’ve heard that opening a new credit card can ding your credit score temporarily, so you’re worried about making a change. In order to overcome such an inefficient behaviour, you need to learn to differentiate reasonable concerns and irrational fear.

Source: Pexels

When you are aware of the major pros and cons in making a decision, you should be able make a decision and follow through. It’s silly to let your fears about what might happen stop you from making a switch when the benefits are so obvious. In some cases — like when your card has a high-fee, high-interest, and low rewards — almost any change might be for the better.

Related: 4 Key Questions To Ask Yourself Before Signing Up For A Credit Card

Fighting Inefficient Biases in Daily Life

These biases affect all aspects of our daily lives, not just credit cards. Even when it’s financially or physically unsustainable to go out 4 times a week, we might continue to do so just because we don’t want to change. Such behaviour patterns definitely need to be reconsidered, and starting with one aspect of your life could help you be more psychologically efficient in other aspects.

In Singapore, there are simply too many great credit cards designed for different needs for you to settle on a card that isn’t giving you the best deals. You shouldn’t be paying annual fees on cards that don’t add financial value to your life (or sometimes even actually hurt your financial situation with higher interest charges).

If you’re feeling stuck, start by taking a hard look at the cards in your wallet. Compare them to the other cards on the market. We’ve done detailed reports on the best credit cards in Singapore that assess strengths and weaknesses of each cards, and make recommendations based on people’s different needs and circumstances. Sort through your options and make the rational decision.

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Cover image source: Unsplash

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