Americans often struggle to talk about money and when they
do, they often downplay how much they owe on their credit cards. That finding
by researchers at the New York Federal Reserve Bank calls into question debt
surveys commonly relied upon to determine how Americans are doing financially,
but it also speaks to why so many of us fall short in tackling our debt and
preparing ourselves for a financially secure retirement.
A big gap
For decades, the Federal Reserve Bank of New York has conducted its Survey of
Consumer Finances, or SCF. Arguably the broadest survey of its kind, the SCF is
something public and private economists rely on heavily to evaluate the average
American's balance sheet. However, because the SCF is a survey, its accuracy
relies on Americans' having a clear picture of their debt situation and
reporting their debt honestly.
Unfortunately, survey respondents' track record, at least in
regard to credit card debt, is poor. After comparing SCF debt survey responses
from 2001, 2004, 2007, and 2010 with the actual debt levels lenders report to Equifax,
one of the three major credit reporting bureaus, researchers discovered that
Americans do a good job reporting their housing and auto loan debt, but that
they significantly underreport their credit card debt.
On average, Americans told surveyors they had 40% less
credit card debt than they really did. Some of that gap can be explained by
people's failure to report business credit card balances that still show up on
their credit report, and by the fact that some respondents might not have any
credit at all, but even after accounting for those explanations, researchers
still determined that people underreported their credit card debt by 37%.
What's going on and
why it matters
After parsing the data, it was discovered that those Americans who most
significantly underreport their credit card debt live in bigger households.
That indicates that individuals in a household may have a good handle on how
much they owe on their credit cards, but that they're far less certain how much
money other members of their household owe, such as their spouse or significant
other.
Not knowing how much money these other members of the
household owe could explain why the SCF results differ so widely from the
credit bureau figures, but more importantly, it points to a big reason so many
families are financially ill-prepared for their future. It's incredibly
difficult, if not impossible, to craft an effective financial plan that reduces
debt and maximizes retirement income without having a complete understanding of
a family's financial obligations; especially when it comes to credit card debt.
Because lenders charge an average 15.72% annually in
interest on variable-interest-rate credit cards, according to Bankrate, credit
card debt is often the most costly type of debt Americans owe. Since credit
card interest rates are so high and the average person owes thousands of
dollars in credit card debt, credit card payments end up taking a lot of money
away from Americans -- money that could otherwise be saved or invested for the
long haul.
What to do and why to
do it
If you're not sure how much your household owes in credit card debt, it's time
to sit down with the other members of your family and have an open and honest
discussion. Once you know exactly how much you owe, create a plan that reduces
your credit card balances as quickly as possible and then sock away any savings
from doing it. Why? Because investing the savings created by paying down credit
cards can add tens of thousands of dollars to your retirement account.
Cutting credit card bills by even $100 per month and then
putting that amount of money to work in an investment earning a hypothetical 6%
annually could increase a person's retirement savings by nearly $95,000 over 30
years. Not only will having that money in your wallet, rather than in your
lender's wallet, go a long way toward helping you achieve financial security,
but it will also allow you to more accurately answer the feds' survey, should
they come calling.
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