Killing the Root Cause of Credit Card Debt

Many understandably don’t want to get into debt. However, many ARE in debt and credit card debt data from the Census Department show that American outstanding credit card debt has increased from just $680 billion in 2000 to $886 billion in 2009. For 2012, the Census projects that this figure was at $870 billion. A large part of the 2012 figures is made up of Visa credit card debt at $359 billion while MasterCard debt is at $255 billion. American Express debt represents $97 billion while store debt is at $94 billion. The rest is made up of credit card debt to the oil company, Discover, and others.

In Florida, credit card debt is said to be slightly above the national average according to Their figures show that the average Floridian had an average credit card debt of $6,658 in 2011 compared to the 2012 national average of $6,576.

Add to that the mortgages that people hold and you’ll see how much Americans owe. Census data for 2010 shows that the total mortgage of Americans in 2010 stood at $13.833 trillion. That figure is down from as high as $14.516 trillion in 2007 but is still significantly higher than the figure in 1990 when total mortgages were only at $3.781 trillion.

The figures show how much debt Americans owe on their credit card. It begs to ask the question of what are the reasons why so many Americans acquire so much credit card debt.

Research on Consumer Misunderstanding of Credit Card Use, Payments, and Debt.

Duke University’s Jack B. Soll, Ralph L. Keeney, and Richard P. Larrick looked into the problem of consumer misunderstanding of credit card use, payments, and debt. The researchers found that people often miscalculated the time it takes them to pay off debt when payment does not cover the interest owed. They also found that people with low numerical skills performed worse when it comes to estimating the time it takes to pay off the debt. The study was made to look into the effects of the new credit card statement format that the CARD Act of 2009 mandated.

The study also found that less numerate people underestimate the time it takes to pay off a debt while those who are more numerate tended to overestimate the time it takes to pay off a debt. The researchers found that the new credit card statement format dramatically reduced those biases.

Financial Literacy for Dealing with Credit Card Debt

Soll, Keeney, and Larrick’s study highlights how numeracy is important in how people understand credit card use and how they pay off their debt. Changes to the format of a credit card statement does have a positive effect on how people understand the consequences of paying only the interest rate and this helps people manage their credit card debt.

However, if you look at the bigger picture, numeracy is just a subset of financial literacy so improving the financial literacy of people should have a greater effect on the way people manage not just their credit card debt but also the way they manage their overall finances.

Financial Literacy Resources

So what should people do to kill the root cause of credit card debt? People should do more to educate themselves about personal financial matters. Recognizing the importance of financial literacy, the Treasury Department has set up the Financial Literacy and Education Commission. The commission has set up the website to help people learn about personal finance and to help them make good financial decisions.

The website has a section about credit that should help consumers understand debt and how to manage it. In addition, it has sections on how to earn, save, and invest money. Aside from the website, there are other resources people can tap into in order to get a better understanding of their finances. There are tons of reputable websites out there to help make people become more financially-savvy. There are also books and television programs like the Suze Orman show that people can read and watch to better understand their finances.

Other Causes of Credit Card Debt

Soll, Keeney, and Larrick’s study also discussed previous studies that show how and why people misuse their credit card. One study found that people tend to spend more money when they are using a credit card than if they were using cash. Another study found that people don’t experience more “psychic pain” when spending using their credit cards compared to using cash so they have poorer recollection of how they spent their money.

Another study also found that people with higher credit limit spend more because they feel wealthier even though their income and savings say otherwise. As people misuse their credit card, they are in more danger of falling into credit card debt.

People also engage in impulsive buying and buy stuff they don’t really need when they have a credit card. All this can lead to debt problems for the card holder.

When used correctly, credit cards do have benefits to many consumers and it’s up to card holders to manage their credit card debt dutifully. A credit card lets people do away with carrying a lot of cash and build their credit history. The rewards program of credit cards is another enticing feature that credit card holders get to enjoy.

When people misuse their credit cards, the benefits they get from these cards can be overshadowed by the downsides of having a credit card. Only by understanding their credit card obligations, like paying the right amount on their bill in order to avoid penalties and understand greater concepts from financial literacy can they earn, save, and invest more so as to enjoy better financial health. They can tap into online resources like the website and other resources like books and TV shows in order to become more financially-savvy.



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