Americans Underestimate Their Credit Card Debt By A Third: Study

Americans Grossly Underestimate Their Own Credit Card Debt

Americans grew wary of credit-card debt during the recession, a time when no one was eager to try to live beyond their means. But in the past two years, consumers have started to take some of that debt back on -- and in a potentially worrying sign, many of them don't seem to know exactly how much they have.

A recent study from the Federal Reserve Bank of New York suggests that the consumers who hold credit cards and the lenders who issue them often have very different ideas about how much the cardholders owe. The average household believes they hold about $4,700 of credit card debt or 66 percent of the $7,134 lenders -- the ones in a position to enforce -- say households carry.

The study's authors note that they tried to account for the gap in various ways, but it remained sizable no matter how much they tweaked their research methods. They speculate that the discrepancy between borrowers' perceptions and lenders' data might be a result of "uninformedness" on the part of the borrowers -- possibly because credit card charges and balances can be difficult to keep track of, or just because some people choose not to.

The news suggests many Americans still have some progress to make in the area of financial literacy, a subject that rose to national prominence in the wake of the Great Recession. A measure in the Dodd-Frank financial reform act established an Office of Financial Education, and more public schools have begun adding a financial component to their curricula, according to USA Today. Still, the New York Fed's report indicates that many consumers may still only have an incomplete understanding of their day-to-day financial activity.

The findings are also disquieting in light of another recent study, which found that credit card debt has skyrocketed since 2009. Consumers are borrowing more, and in a weak economy, with millions out of work and wages essentially flat, that may not necessarily be a good thing.

Three years ago, out-of-control consumer debt played a major role in the escalation of the financial crisis into a full-on recession. High interest rates and easy access to loans left millions of Americans scrambling to pay off precipitously large debts when the economy took a downturn. In 2009, credit card default rates climbed to a 20-year high as unemployment rates soared.

Today, more Americans are out of work, but credit card default rates are showing a steady decline. This may reflect tighter lending standards -- credit is harder to get these days, with banks and other issuers taking greater pains to limit their cards to responsible borrowers -- but it may also mean that most of the people at risk of defaulting have already done so, as The Fiscal Times notes.

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