Kicking Credit-Card Debt to the Curb

August 7, 2007

Why do so many Americans rack up so much credit-card debt?

Myriad news articles, reports and financial-advice columns offer a
variety of reasons, which fall into two camps: spendthrifty consumers
are to blame and so are credit-card companies’ deceptive
practices.

Legislation should regulate credit-card companies so they don’t take
unfair advantage of consumers, says Suze Orman. On the flip side, consumers must educate themselves about the
intricacies of credit cards and debt, and set financial boundaries,
according to other news reports (see stories here, and here.

A Dynamic Solution

Tackling the problem of credit-card debt calls for a dynamic approach that addresses problems in the industry and among consumers.

Do You Know What You're Worth?

Congress should craft a law that prevents credit-card companies from snookering consumers, as Suze Orman suggests. While lawmakers get busy, so should consumers–busy educating themselves about debt, and setting financial goals and limits.

Education can start as early as age 5, says Jaclyne Badal in The Wall Street Journal. That education should continue throughout life, especially as teenagers turn 18 and head to college, where many have their first encounters with full-on personal finance.

According to Suze Orman:

We require high school students to take driver’s education and pass written and driving exams before we allow them to operate a car. But we do absolutely nothing to educate them on how debt works, and instead allow credit card companies to set up booths at freshman orientation and sign kids up for cards with sky-high credit limits. Ideally, every college-bound student needs a quick course on the true cost of debt.

In a perfect world, consumers would still take advantage of credit cards, but pay off their bills every month, leaving little room for industry abuses.

According to a Baltimore Sun story (no longer posted):

“It isn’t rocket science; it’s being able to restrain yourself,” said [Sue] Evers, who lives in southwest Wisconsin. “My husband and I do have a couple of credit cards and, surprise, we pay the balance when we get the bill and have never had a problem abusing their convenience,” Evers said.

“I feel strongly that with the advent of plastic money you never see, money seems more and more like something unreal that you just ‘use’ whenever you see something you’d like,” Evers said. “We do enjoy the convenience of the credit cards but understand their accountability.”

Personal Finance and People in Debt

Statistics and reports certainly suggest a need for reforms.

When it comes to educating our young about credit and debt, the WSJ story explains:

A recent survey of 1,000 teens sponsored by brokerage Charles Schwab found that while parents talk to their kids about money, the chats aren’t teaching the specifics. Only 24% of teens say they’ve learned responsible credit-card use from parents, while just 20% say their parents taught them to invest money wisely and make it grow.

Adults could use a primer, too; The Baltimore Sun story highlights a national survey by GFK Roper Public Affairs that “reveals both a lack of basic knowledge and a lack of discipline in the use of credit cards.” More than a third of the people surveyed said they use their cards for things they can’t afford, and more than 90 percent didn’t know how long it’d take to pay off a card when only making the minimum payment.

Meanwhile, a GAO report released last fall indicates the major credit-card companies have a full bag of dirty tricks:

Although issuers must disclose information intended to help consumers compare card costs, disclosures by the largest issuers have various weaknesses that reduced consumers’ ability to use and understand them. According to a usability expert’s review, disclosures from the largest credit card issuers were often written well above the eighth-grade level at which about half of U.S. adults read.

Writing everyone can understand is just good customer service, don’t you think?