Posted on 02/28/2008 10:51:00 AM PST by upchuck
Americans don't understand debt, which may be one reason that they have too much of it, according to a survey released Tuesday.
The survey presented 1,000 people with a hypothetical scenario about credit card debt and asked them to compute how long it would take to pay it off. Only 35.9% of the 1,000 respondents could figure out how many years it would take for the amount they owe on their credit cards to double. A full 18.2% did not know how to respond and 31.9% of those surveyed over-estimated the timeframe.
The survey by Harvard Business School and Dartmouth College professors and TNS asked respondents to assess their debt levels. Those who said they felt they were carrying too much debt were found to be "wildly wrong" when it came to using compound interest to calculate how long it would take to pay off that debt.
Of those polled, 26% said they consider the debt they are carrying to be unmanageable, while 61% said their debt level was "just right."
Americans don't realize they're unaware of some of the complexities of personal finance - like compound interest - said Bob Neuhaus, the executive vice president and the head of the financial services sector in the U.S. for TNS. "If financial literacy was higher, you would see more caution in the use of consumer debt. It would not eliminate the problem, but it would mitigate [it]."
The survey draws attention to a large problem without an easy solution. "Even those with a college degree don't have an understanding of the basic finance ideas," said Annamaria Lusardi, Professor of Economics at Dartmouth College.
However, there are smaller, more manageable steps that can make a difference. Harvard Business School Professor Peter Tufano, a self-proclaimed believer in financial education, does not see credit as inherently bad, but he said that debt services are much more complicated now than they were a generation ago. He said credit card companies could help by creating more consumer friendly credit contracts that plainly spell out the terms, and bills that itemize outstanding debt so consumers can grasp the reality of how they spend money and how long it will take to pay.
A lack of savings could be compounding the consumer debt problem. Another nationwide survey of 1,000 Americans released Monday by the American Savings Educational Council (ASEC) and America Saves found that a mere 53% of Americans have adequate savings with only 28% saving the recommended 10% of their annual income.
Three-quarters of Americans surveyed said that they spend less than their income and save the difference, which may provide enough for an emergency unexpected expense, but only a little over 50% have enough savings to provide for a comfortable standard of living in retirement.
[Excerpted 'cause it came from CNN]
The gift that keeps on giving.
Pot calling the kettle black.
In terms of the schools, they certainly share SOME of the blame. Parents deserve the most. Just because your kid goes to school doesn’t mean it’s hands off parenting.
From what I have seen, many kids see their parents spending money so that means they can. The younger generation tries to live a lifestyle their parents weren’t able to afford until after 30 years of hard work. Credit cards and the like make it easy to keep up the illusion.
Soon we will be asked to bail out credit card debt.
I think it's reached its pinnacle. Now our economy's in the tank.
Thanks, liberals.
when they say 10% of income i am assuming they mean any type of saving including retirement contributions.
Why, no one needs to understand these things these days..... if things get bad, Congress can always push that rebate button and give everyone more money. More money, more happy people, I think they need to do this again, and again...and again. It’s like a PARTY. No one has to pay, because it’s the governments money. Party ON... Obama has got answers he’ll DOUBLE the rebates, I guess I know who I’ll vote for.
I hope that means they have no debt.
Even though my kids are only 4 and 5, I recently started them on a basic program of donating, saving and investing. Now that schools are hiring credit card companies to teach kids about money, I figured I better be proactive.
Good plan with your kids. We did that with our daughter beginning at that age. We gave her enough to save some, spend some and donate some. She was required to use her money for a few of her needs and learned quickly that blowing all her money at Claire’s didn’t leave enough for birthday party gifts. By the time she left for college she was fiscally responsible and as a junior in college she is debt free and has saved a nice little chunk of money.
And they still get to vote.
Part of the problem is that the government encourages financial irresponsibility. Savers get punished, spenders get rewarded.
Just remember, though, credit cards are not necessarily evil: they are a means of managing short-term cash flow, like any other line of credit. However, for most folks, the potential for abuse (leading to large balances) is there. (The smart people pull off stunts like this one, though.)
Americans are lazy, and would rather watch Dancing with the stars or American Idol.
Most adults who have a mortgage actually believe the best mortgage is the one with the lowest fees and interest rate!
Advertising has a lot to do with things but the educational system we have in the public school system plays a substantial role in dumbing down children and inhibiting their will to ask questions and find the truth......
Congress needs to take a lesson as well, they are going to put us in bankruptcy
How long until China forecloses on America?
OK, I’ll bite. Why would it be better if my mortgage had higher fees and a higher interest rate? Or is that not what you meant?
Don’t you worry you sweet little heads, chillun. Pappy Barracky gonna take dat money ‘way from dems what saved and give it ta dems what vote Dem.
I disagree. It’s not ‘financially illiterate’ to not be able to make the credit card payoff calculations as outlined. It’s simply a lack of focus or interest in the lives of most people, until they get into trouble. Even at that point, they may not be able to make the cited calculations, but they hopefully are smart enough to seek help in one way or another.
I’m thinking that most people know that carrying a credit card balance is not a smart thing to do, but other priorities trump that, big time - some of which involve really stupid spending patterns, mistakes in life or just bad luck. If you want to play, you’ve got to pay and stopping to calculate the impact is always a good thing to do, but not doing that doesn’t make you financially illiterate - just unfocused on solutions.
Not worth the hassle. I keep the number of cards to a minimum and pay off the balance each month.
Because it would more likely be a 15 or 30 year mortgage that keeps your payments level until the house is paid off. It would also more likely be for 80% of a realistic appraisal of the home’s resale value. Most of these people who are stuck with mortgages of 20 times their annual income and twice the resale value of the homes are in ARMs that had very low interest rates, and on very low fees on a percentage basis.
Most people in a few states may have mortgages 20x their annual income from 2004-07 (Florida, Cali, NY) but most states do not have that. I can buy the median house in my area for 4x my annual income in the city and 3x my annual income outside the city without taking my wife’s pay into consideration. Most homes across America are still between $150-$250k. Since the median income is around 50k that means somewhere between 3-5x the average cost of a home—and that’s only if you are buying now. Most people’s mortgages (or no mortgage left at all) are from longer ago.
But I think that the fees on those "creative" mortgages tend to be higher, not lower--though they might also be well-hidden.
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