Kicking Credit-Card Debt to the Curb

Posted by Kristina Cowan

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 in The Philadelphia Inquirer. 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, 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.

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:

"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?

• Keeping Up With The Joneses (KSDK.com, for Newschannel Five in St. Louis)
• Laws are needed to keep credit-card firms in line (The Philadelphia Inquirer)
• Teaching Kids -- in Stages -- About Money (The Wall Street Journal)
• Credit cards don't have to ring up debt (The Baltimore Sun)
• Credit Cards' Hidden Costs (The Washington Post)
• Increased Complexity in Rates and Fees Heightens Need for More Effective Disclosures to Consumers (GAO report)
• Debt is not insurmountable, and these folks are proving it (The Richmond Times-Dispatch)
• Getting a Grip on Debt (The Motley Fool)
• Pouring Talents Into a Part-Time Job (The Washington Post)

Comments

[credit card for students]

This blog is right. It is the credit card users and the credit card companies who must be blamed on the rise of credit card debt.

And to resolve this problem, proper legislation as well as consumer education is needed. We need a law that would protect the consumers from the threats of abusive credit card companies. At the same time proper education on how to use credit card properly must be implemented. Even at a young age, the children must be taught on how to use the credit card the right way, why they should use it, and when they can use it.

[Annabelle M.]

Nice piece, KC. For an especially entertaining, though-provoking look at how the financial and political powers collude to encourage consumer debt, I'd recommend the documentary "Maxed Out," now available on DVD. It should be required viewing for anyone who doesn't read the fine print on those credit offers.

Keep up the good work!

[Steve]

I agree they should make a mandatory class senior year of high school on credit and debt. This would greatly help kids in college from getting taken advantage of.

[Amber]

Sending out giant checks in the mail to low income homes should be outlawed, like HFC and Beneficial do. They have huge interest rates and the prey on the less fortunate. Someone who's desperate is likely to cash that check and then they are in a world of hurt.

[Windsor L.]

Predatory lending should be definitely eliminated in the US, but by the same token we have to get away from this overly materialistic society. (i.e. Does anyone really need a $700+ designer purse or a new car this fall?)

Having just come back from a trip to Germany I can confirm that those folks are not nearly driven as Americans are to buy *everything* they see. It's also interesting that in Germany very few stores accept major credit cards. Instead they use their Euro-version of the debit card. My husband and I wonder if this has more to do with the banking fees charged to merchants by the major credit card companies or if the Germans really do have a better grasp on their finances. After all, in Germany one has to come up with a 40% down payment before they will be considered for a mortgage. (really!) Does this knowledge lead to better spending habits overall or are they just less materialistic than we are? They certainly have nice stuff in Germany (clothes, accessories, cars) but it seems as though the Germans have the ability to control how much of it they actually bring home with them, whereas the Americans do not.

[andrew]

we must include the credit card information details as subject for the students to know about it .Its because they use it more in than the others.and also they come to know about the high interest paid for it.
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andrew
http://www.stop-credit-card-debt.com

[debt advice]

Pretty well said..!!!
Eileen..
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debt advice