What Gym Fees and Interest Payments Have in Common

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Ever been curious about the seeming universality of the desire to purchase goods and services without paying for them immediately? Many credit card users fall victim to this desire for instant gratification knowing full well they can’t actually afford what they bought without going into debt. Deferring payment until tomorrow allows for a surprising amount of unfettered enjoyment today.

When you paid for a gym membership, you probably knew, deep down, that you’d end up going less than you intended. You probably wouldn’t even go often enough to make up for the gym fees. And yet, your membership card is in your wallet, isn’t it?

What unused gym memberships and overused credit cards have in common is hyperbolic discounting, a theory of behavioral economics that molds the business models of fitness centers and credit card companies alike.

If I can’t have it now, I don’t mind the wait

It’s been well-documented that people choose immediate benefits over later, greater rewards. Exercise is but one example: workers regularly fail to contribute enough to their retirement accounts, preferring instead to spend their paychecks; while everything from smoking to Diet Coke is symbolic of the human tendency to choose pleasure today over health tomorrow. According to a 1994 study, a majority of people would prefer to be given $50 the same day rather than $100 in a year.

Without the lure of immediate gratification, though, humans make more rational decisions. While someone might prefer $2 today instead of $5 tomorrow, he wouldn’t choose $2 in a year over $5 in a year and a day. This variation is known as time-inconsistent discounting: we make worse and worse decisions (we “discount” the true value of the future good) the closer we are to present-day rewards.

What Does This Have to do With Credit Cards?

Credit card debt is a perfect example of hyperbolic discounting. Paying off only the minimum amount of your debt will eventually cost you more in the long run, since you’ll be charged interest on your remaining balance each month. However, because of our tendency to prefer an immediate pick-me-up (we are, in economic terms, “present-biased”), people ignore this reality and spend what they could have used to pay down their debt.

Consumers consistently choose credit cards with no annual fee, even though they might end up paying more in interest or receiving fewer rewards. The annual fee is predictable, concrete and visceral: for as long as you hold the card, you’ll be shelling out $75 a year. On the other hand, interest payments are abstract and allow for rationalization: “This is only important if I carry a balance, which I don’t think I will.”

The same instinct gets people to get cash back credit cards despite their higher interest rates. The immediate thrill of getting back 1% of their purchases can blind consumers to the cost of carrying a balance, which usually eclipses rewards by a significant amount.

Don’t Let This Be You!

When you feel yourself gripped by an offer you can’t refuse and look towards that plastic rectangle in your pocket as the means to attain it, remember that the company that issues your card profits off your brain chemistry. They know that you’ll be tipped towards ignoring any drawbacks in the face of enjoyment in the present moment. You can outsmart them, though, with just a little self-control.

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