Have you ever bought one nice thing, and then felt like everything else you own needs an upgrade too?
You bought a new phone. Suddenly your old earphones seem bad. Then you buy better ones. Then a new case. Then a smartwatch and a new laptop. One purchase turns into five.
This is called the Diderot Effect, named after the French writer Denis Diderot. The idea is quite simple: one upgrade often leads to more upgrades.
Today, credit cards make these multiple upgrades much easier.
Why Credit Cards Make It Worse
If you don’t use credit cards, you can only spend as much money as you have in your bank account. However, credit cards remove that barrier. You can buy first and worry later.
Let’s say you buy a premium phone worth Rs 1 lac on credit card EMIs.
The purchase does not feel as heavy on the pocket. You must pay only Rs 8,500 per month for 12 months.
EMIs make such purchases easy. And credit cards make EMIs easy.
Once you have purchased the phone, you need matching new earphones and a premium case to protect your phone. Thereafter, your 5-year-old but perfectly working laptop does not fit well.
Alternatively, you buy an expensive TV, and suddenly your drawing room furniture looks stale. And you start figuring out how to fit the entire drawing room renovation in your budget.
Each decision feels reasonable. But together, all these costs add up.
How do banks encourage this behaviour?
The banks understand how we think. Thus, they design credit cards to make spending feel rewarding.
Premium Card = Premium Lifestyle
If you own a basic credit card and have a good CIBIL score, you already know the drill.
The banks will keep sending offers to upgrade to their premium offering. While you must pay a small fee, you also get a range of offers. Each one is designed to make you spend more.
Airport lounge access, dining discounts, travel offers, reward points
You say, why not? You deserve this.
Gradually, your choices change. You spend just to make the most out of your credit card.
Instead of a budget hotel, you book a nicer one. Instead of eating at home, you dine out to earn points. You start thinking too much in terms of those free flight bookings and free nights at luxury hotels. Nothing wrong with that. However, this premium credit card may be changing how you spend.
The card changes how you see yourself. And your spending changes to match that image.
Reward Points Push You to Spend More
Banks nudge to spend more with offers like
- 5X points on dining
- 10X on travel
- Bonus points (or annual fee waiver) after spending ₹5 lakh
You were trying to figure out ways to justify fresh purchases to yourself. If this helps you avoid paying the renewal fee, spending a little more seems like a smart decision too.
That “little more” becomes your new normal.
These reward points and spending milestones are essentially a nudge to spend more. The banks know, once you get used to spending more, it is not easy to hold back. Next year, you will mostly spend at that higher level.
EMIs Hide the Real Cost
Credit and EMIs are powerful.
A big purchase feels scary. A small monthly payment feels quite manageable.
EMI changes the way you think about your expenses.
Rs 1 lac at one go seems out of reach. Rs 8,500 per month for 12 months seems comfortable.
Since EMIs don’t hurt upfront, you will soon have
- Phone EMI
- Furniture EMI
- Television EMI
- Laptop EMI
- Vacation EMI
Gradually, these numbers add up. Your monthly income hasn’t increased. But your fixed expenses have. This is how lifestyle slowly becomes expensive. A certain level of expense becomes your new normal for no real reason. This is also called lifestyle creep.
You must have also noticed that the banks offer better deals on EMI purchases than outright purchases. A reason is that the banks can recover a portion of the discount through processing fees and the interest.
The Real Risk
The problem is not one luxury purchase. The problem is the chain reaction.
As you continue to indulge through the support of card EMIs,
- Credit card bills grow
- EMIs increase
- Savings and investments reduce
If you don’t pay your full bill every month, interest charges make things worse.
The banks don’t need you to fail. They just need you to keep spending and paying them interest. Remember, over and above the interest, the banks get a cut every time you use your credit card.
If you continue your merry ways with corresponding increase in income, there is a risk that you may encounter financial stress.
How to protect yourself?
You don’t need to stop using credit cards. You just need awareness about your finances.
Ultimately, you must see if your other financial goals are getting compromised because of your spending patterns. Once you figure you are not saving/investing enough, you will take remedial action.
Too many EMIs is clearly a red flag. That means you are just softening the blow and not really spending less. When you notice this, stop purchases on EMIs.
Before buying, ask yourself these questions. Would I still buy this without reward points? Is this purchase really needed or am I just buying because of something I bought earlier?
A few simple rules help. Always pay your full credit card bill. Avoid chasing reward milestones. Wait at least 15 days before making extra “upgrade” purchases. Review EMIs every few months. Decide an EMI threshold i.e., your cumulative EMIs will not breach that level. And don’t breach those thresholds.
And the simplest of them all. Invest before you spend. Consider your financial goals and see how much you need to invest for those goals. You spend what remains after investing. I know it is not easy. And we can offer justification or excuses for almost anything. However, if you are serious about this approach, eventually, you will know that you are deviating too far and control your expenses.