Texas Tech University

Beware of Credit-Card Mismanagement – It Could Just Ruin Your Holidays

Glenys Young

November 12, 2019

A new study shows that credit-card users’ risk tolerance determines who will experience greater anxiety and stress.

As the holiday shopping season ramps up, keep an eye on your credit-card spending. For a significant portion of people, credit-card mismanagement can hurt not only their financial satisfaction, but also their overall psychological well-being.

Credit cards can be very convenient – they let us buy things now with the promise that we'll pay for them later. But what happens if, for some reason, you can't pay when the time comes? That could equal a big hit in increased fees and interest rates for future credit-card usage or, depending on the amount of debt, it could even cost a person their car or their home.


For some people, getting the desired item now is worth the potential loss later on. For others, it's not. This is the concept of risk tolerance. Those who are comfortable using credit cards, despite the risk, are considered more risk-tolerant, while those who are less comfortable are considered less risk-tolerant.

Using data from the 2010 Health and Retirement Study, a nationally representative survey of Americans age 50 and older, a new study from the Texas Tech University Department of Personal Financial Planning shows these less risk-tolerant individuals are at a greater psychological risk than their more risk-tolerant counterparts because, when they don't properly manage their credit-card spending, they feel more stress and anxiety over it.

"Those with high risk-tolerance, who face the same increasing fees and interest rates as those with low risk-tolerance, do not have their financial satisfaction reduced as a result of their mismanagement," said study author Charlene Kalenkoski, a professor and director of the doctoral program in personal financial planning.


Because the more risk-tolerant individuals feel less anxiety over credit-card mismanagement, they often have more credit cards, higher credit-card balances and more negative credit-management practices on average than individuals who are less risk-tolerant. These more risk-tolerant people also are, on average, slightly more financially satisfied.

The study found that neither the number of cards owned nor the amount owed on all credit cards had significant effects on the financial satisfaction of less risk-tolerant users, suggesting that any dissatisfaction produced by using credit cards comes from the problems associated with mismanagement and not from the actual loan itself.

"Those who are less tolerant of risk were not less satisfied when they borrowed more and subsequently paid more interest," said lead author Patrick M. Payne, an assistant professor of finance and financial planning at Western Carolina University. "Their satisfaction fell only when they made mistakes in how they managed the card, such as missing payments or going over their credit limit, regardless of how high the limit is. Thus, even for these users, it does not appear the financial costs of borrowing is behind their distress – it's the negative psychological effects of knowing they have made mistakes with their credit card."

While some credit-card users may suffer psychologically from this mismanagement, the bigger problem, the authors agreed, is in those who don't suffer.


"The real challenge will be getting the high-risk-tolerant clients to see the error of their ways, since they experience no short-term discomfort from increasing credit-card fees and interest rates, even though there will be long-term effects," Kalenkoski said.

Payne, a former Texas Tech doctoral candidate who began the research as part of his dissertation, said the results were somewhat counterintuitive from a financial-planning perspective.

"The interesting thing we found in this study is that there is a group of people who appear to be genuinely unconcerned with the financial costs of using – or misusing, as the case may be – their credit cards," he said. "This is interesting because a lot of financial planners and educators focus considerable efforts on showing people the high costs of credit cards, assuming that these costs will serve as a deterrent for poor credit-card management. What we found instead is that people who have a high tolerance for risk are unlikely to be motivated by these costs. Therefore, in order to be effective, financial-education efforts need to be aware that some individuals will not react to this approach, and a different approach will be needed."

Christopher M. Browning, associate chair and assistant professor in the Department of Personal Financial Planning, also was involved in the study.