Debt, if not managed properly, is a whirlpool. You think with every step you take, you are coming closer to the ground, when in reality, you are simply sinking further and further into the ground. Similarly, with every interest payment you make, you might feel that you are becoming debt-free, when in reality, you are just being pushed into more and more debt due to increasing interest rates. This is where human psychology and their outlook towards money management push them into a debt trap.
To understand why people fall into debt traps, we need to understand people and their psychology towards money. Behavioral finance, a subfield of behavioral economics, proposes that psychological influences and biases affect the financial behavior of investors and financial practitioners.
People and their spending habits play a major role in understanding how they fall into debt traps. Instant gratification and impulse spending are one such phenomenon. Instant gratification refers to the desire to experience pleasure or fulfillment without delay. This urge leads one to choose immediate satisfaction over a future benefit, often disregarding long-term outcomes. Say a person finished a presentation, and now he/she wants to treat himself/herself by, say, ordering pizza. Such spending is completely unnecessary and can turn into a habit if not kept in check. Indeed, one must always celebrate the small wins for good mental health. But for good financial health, such spending must be avoided. Impulse spending refers to buying goods or services without any prior planning. Periodically, one must make their budget and stick to it. Failing to do so reduces savings and increases unnecessary spending. If one becomes habitual to either of them, they will continue to spend, even if it comes at the cost of debt.
Credit cards and their “Buy Now, Pay Later” scheme function on this psychology of people. It is a type of short-term loan that lets shoppers pay for products in small installments spread over a set period. These services are typically used for minor, although expensive, purchases like smartphones or luxury clothing. Buy Now Pay Later (BNPL) companies have formed one of the most rapidly expanding categories in the consumer finance industry. According to Global Business Report 2025, the global BNPL payment market is expected to grow by 13.7% on an annual basis to reach US$560.1 billion in 2025. The global BNPL market experienced robust growth during 2021-2024, achieving a CAGR of 21.7%. This upward trajectory is expected to continue, with the market forecast to grow at a CAGR of 10.2% during 2025-2030. By the end of 2030, the BNPL sector is projected to expand from its 2024 value of USD 492.8 billion to approximately USD 911.8 billion.
Various psychological biases also play a major role in people’s spending habits. The idea of investing in a flawless business plan, even if it means that one must take out a loan, might sound appealing, but one must not forget that the probability of losses in a new business is almost as much as the gain. This human behaviour of overconfidence by focusing on the gains more than the losses is termed as ‘optimism bias.’ An optimism bias is the tendency to overestimate the likelihood of positive events and underestimate the likelihood of negative events. Optimism bias causes most people to expect that things will work out well, even if rationality suggests that problems are inevitable in life. Borrowings and spending made without calculating the possible risks can lead to an increase in financial burden, and a simple debt creating a trap isn’t a long process.
In 1954, psychologist Leon Festinger proposed a theory called “Social Comparison Theory.” In this theory, Festinger says that people tend to evaluate themselves by the success or failure of others. This helps to assess our opinions and abilities. This theory explains people and their spending habits. With the increase in social influence, people try to fit into the social status of society, even if it requires burning a hole in their pockets. Another key concept that shapes people’s spending habits is “lifestyle inflation.” It is a tendency to increase one’s spending as their income increases. There is a saying that says, “Money can’t buy happiness, but I’d rather cry in a Jaguar than in a bus.” But if we learn to smile on the bus, the need for unnecessary spending would decrease, which would lead to an increase in the wealth of the person. Lifestyle inflation starts due to social comparison. After one comes to a higher income bracket, they start spending recklessly. Their wants become needs. Such consumer behavior hinders financial goals and leads to little to no savings for the future.
The use of status symbol goods, or as economists call them, “Veblen goods,” has led to a rapid increase in demand for such luxury items. The urge to live a life like every celebrity is a distant dream, but consumers believe that if they own the luxury items as they do, they will feel as if they are a part of their lives. Consumers need to understand that lavish life comes with a cost other than money. One of the examples is how a man once bought a BMW and his social status boomed drastically. However, the problem was that he bought it by taking a loan from the bank. When he could not pay the loan back, the car was seized. People think that the act of strutting luxury goods might upgrade their status in society and help them live the dream, that is, the life of influencers. Living off debts can cause a grave in the future. Thus, it is rightly said that he who buys what he does not need steals from himself.
In Big Bang Theory, an American TV show, one of the protagonists, Penny, is shown to be always in debt. Even after getting a stable income from ‘The Cheesecake Factory,’ she always ends up broke by the end of the month. In one of the episodes, Penny tries to console Sheldon by telling him how she buys a ‘cute dress’ every time she feels sad. This scene is particularly significant because it depicts the spending habits of almost all the consumers in the world. Shopping is done not just for necessities but also for pleasure. Such emotional spending increases the financial burden, and to cure this burden, people shop. Unfortunately, in this endless loop people forget that the greater loss is that of the money charged on the credit card.
In one of the episodes of Tarak Mehta ka Oolta Chashma, a famous Indian TV serial, they show how when Babita didn’t have any cash on her, she paid using her credit card. Fascinated by the idea of ‘free money,” which in reality is nothing but a debt, other members of the society start using their credit cards recklessly. This is a common psychological behavior among humans that the companies target. By providing enticing offers such as cashback, EMI, lifestyle perks, credit scores, etc., companies get a guaranteed loyal customer base. Using credit cards isn’t wrong, but one mustn’t forget that at the end of the day, it is just a debt that needs to be repaid because a habit of not paying the bills and continuous careless spending can lead to a debt trap.
A financially disciplined person makes rational decisions about money management. They are able to control impulse spending and pay their bills on time. Thus, to prevent debt traps, we must first focus on financial literacy. Financial literacy includes money management and understanding how one can have a secure financial future.
Other methods to work towards better money management and not fall into debt traps include practicing delayed gratification. One indeed wishes to celebrate small wins. But saving them all for a bigger one not only helps in controlling impulsive spending but also promotes patience and mindfulness. Another pattern noticed among humans is that they spend money whenever they feel overwhelmed. Thus, people need to understand such emotional triggers and find pocket-friendly alternatives whenever they feel the need to shop. Such small practices can lead to a greater change in one’s behavior towards money.
If one is in a debt trap, the best method to tackle it is through the debt snowball method. It is a strategy of repaying debts in ascending order. Basically, one first pays the smallest balance and progressively works towards paying the largest amount. The idea behind this is that such small wins act as dopamine as one is getting closer and closer to the end. Though in the beginning, repayment seems to be a sacrifice from the lavish life one can have, it is a financial freedom, as one can have a stress-free financial future.
Understanding such cognitive bias that one has towards money can help in identifying what triggers them and what could motivate them to break the chain. It is rightly said that a stitch in time saves nine. Therefore, one must begin now. After all, it is never too late. Working towards the change in attitude towards money management, one can break free from the shackles of the debt trap.
By: Anvesha Sharma
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