New Credit Card Rules Won't Stop You From Making Bad Decisions
Barbara Kiviat in Time takes a look at the one aspect of credit card debt that no amount of government reform is going to fix: the human brain's tendency to fail miserably when it comes to making decisions about spending.
There are piles of evidence that people are bad decision makers when it comes to how they use credit cards. Even when presented with full and fair information, they often make decisions that are not in their own economic best interest.
Here are three examples from the article:
- We're not always good at picking the best teaser rate offer, because we fail to take into consideration the length of time of the special rate and the true likelihood that we'll pay off the balance during that time.
- We don't give penalty and other fees enough weight when choosing a card, again because we don't seriously consider the possibility of paying late or going over the credit limit.
- We're frequently willing to pay more if we pay by credit card. Kiviat writes, "In one experiment, Drazen Prelec and Duncan Simester of the Massachusetts Institute of Technology found that people were willing to pay twice as much for basketball tickets when they were using a credit card as opposed to paying cash."
The bill before the Senate does try to address some of these psychological stumbling blocks, by requiring credit card providers to show customers how long it will take to pay off a debt, and how much interest it will cost, if they only pay the minimum amount.
Regardless of what happens on the provider side of the issue, the next time you're shopping around for a credit card, it's probably a good idea to be more pessimistic about your future than you normally would be, so that you don't dismiss things like hidden fees, skyrocketing rates, and the possibility that some emergency will leave you carrying an unexpected balance.
"The Real Problem with Credit Cards: The Cardholders" [Yahoo] (Thanks to PewPew!)
(Photo: richardmasoner)
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Comments:
Stupid is as stupid does.
If you have to carry a balance on your credit card for months and years on end, you are living above your means and need to either make more money, cut expenses or both. It is not the credit card that got you in trouble. It is your lifestyle and financial ignorance. Did you put that restaurant steak dinner on your credit card years ago? Have you carried a balance for years? You have been paying stupid interest on that old steak dinner for years? How stupid is that?
@kwsventures: I've said this before in another post. I know so many people who put a lot of time into researching the best price for [something] only to put the purchase on their credit card and make minimum payments. Next thing you know, they paid $2500 for a $1000 TV they bought for $899. What a bargain.
I wish she'd included a caveat about how sometimes people use them for unplanned and unwanted expenses- like the loss of a job and subsequent medical issues. Too bad shopoholics had to ruin it for everyone else.
This has nothing to do with some innate inability of the human brain to rationalize financial information. Our brains can handle problems that are ridiculously complex relative to the problems of other animals, and they (our brains) do that with great ease by comparison.
The real issue is a terrible lack of financial education in our formative years. Most K-12 systems teach English, History, Science, and Math. That's it. There are few "life" classes in there. Perhaps "Shop" or "Home Ec", sometimes "Physical Education", but very rarely "Money Concepts", "Economics", "Basic Investing", "Professional Development", etc. We've been dumbing-down our students for decades, and we're surprised at the end result?
Couple that with thirty years erosion of the concepts of parenting and community and you've got a terrible group of factors that all lead to one thing: poor financial knowledge and an inability to make informed, sound financial decisions.
Those who took only a college class scored more than a full point (or letter grade in academic terms) better than those who took only a high school personal finance course. Those who took only a high school course did not do better than respondents who did not take any class on personal finances.
You can't teach 'em, the stupids I mean. You just have to decide how to deal with 'em.
@pecan 3.14159265: Much of that isn't simply stupidity, though, it's the way brains are wired. Some of us are lucky enough that we can hedge strategically against the wiring or have enough money that these differences don't have much impact. Not everybody is.
@ADismalScience: Ah, but would you not then deal with them by increasing class load and class experience? Push that college finance class down to the high school level, and suddenly everyone in high school now has access to that "full letter grade" worth of knowledge.
Better to educate our populace, proactively and with the preventative in mind, than to throw them to the wolves and/or maintain our reactive society.
@pecan 3.14159265: I'd tend to agree. I wouldn't necessarily say stupid, but seriously, why is this being credited as some sort of newsflash? As long as there has been credit, there have been people that can't use it wisely or don't know how to. Does it really take some kind of "credit crisis" - or whatever euphamism you want to use - to bring to light that a lot of people are poor financial managers? C'mon peeps!
It is your lifestyle and financial ignorance.
Or your health. Although I suppose that could be considered part of your lifestyle. The financially ignorant should really learn to budget $60,000 in case they have a heart attack, just like the financially literate. And they should learn not to lose their jobs, either. Ignoramuses.
@floraposte: I just don't buy that it's hardwired into our brains that we can't take more time to make better decisions. Some people continually make bad decisions, and I don't think you can blame genetics...I think you can blame lack of education and a lack of desire to make better choices in life. I fully believe in psychological roadblocks. "Predictably Irrational" by Dan Ariely is a great book that shows many of these psychological pitfalls. But I don't think it's just ingrained in us, I think we have to really learn to be this way only to work our way out of the hole.
@kwsventures: 'tis true. People use credit cards for really stupid reasons, like restaurant food, with no funding to back it up at the end of the month. The card then ceases to be the convenience it was really supposed to be - it's a payday loan.
@floraposte: We have a lot of instincts that, I would like to believe, we disregard because of training, wisdom, or intelligence.
Removing universal default won't prevent people from missing payments or over spending, but it does bring the penalty back into the realm of reason.
@PunditGuy: Let's take these problems on at a time. CCs need some regulation and we need to do something about healthcare. Just because CCs are first does not negate the need for something to be done for healthcare.
Why is it ever a surprise that we lie to ourselves?
"I'll have this balance all gone in six months" is right up there with, "I'll lose 15 pounds before going to that wedding" or "I'm going to make sure I'm in bed by 10 every night next week." Everyone does it, and the very few people who never, ever do are generally too smug to have a conversation with.
@HRHKingFridayXX: That's where my big balance came from. An uninsured trip to the ER, followed by two moves in 18 months.
It's now half of what it was at this time last year, though, so at least that second move, to the no-longer-new job, was worth it. ;)
Somehow, Michael Jackson springs instantly to mind.
She has a point about picking the best teaser offer, but working out a budget can help with that. When I was offered 0% on a balance transfer to a new card for 1 year, I looked at what my higher interest balance was and figured out how big the monthly payment would have to be to pay off my entire balance. The monthly payment turned out to be feasible so I went for it. I've already made an extra payment so I will have this balance paid off before the 1 year mark is over.
Do you want to know what I really hate? The fact that I can't get my stupid self to Costco to save money on all of the Diet Coke I consume.
If I did a real accounting for every single 20oz bottle I have consumed at nearly $1.50 a pop during tax season, I think I would have been able to buy my own Coca-Cola bottling plant.
@Sean Masters: I wish there was the "smug poster" icon available for you. Anyway, you were shown up by someone who actually read the study. Take your beat and move on. Your follow-up post argues that correlation = causation, that simply taking the college class gives you that full letter grade increase, which is wrong. Did you also not take that one college class?
@Sean Masters: As I say every time this is brought up, Illinois has had mandatory consumer education as a condition of high school graduation for decades now.
Illinois is not noticeably financially smarter than our financially unedumucated neighbors.
And surely Ms. Kiviat knows that credit card companies are always upfront with their fees etc. by listing them in the micro mouse print of the contract which isn't sent until after you get the card...
I always like to think I'm immune to this trap since I think of cash and credit cards in precisely the same way. But lately, as I've been thinking about new cars, I find I'm very stupid when it comes to buying things like a car on credit.
I have enough money to buy the car I want in cash. But I wouldn't pay for all of it in cash, because I keep thinking about keeping much of that money invested. In reality, of course, I could very well wind up paying more in interest on a chunk of that money than I can get in returns from investing it. So why am I still be willing to buy something that if I had the choice between that much money in my bank account, and a car worth that much money, I would so obviously choose the money in my bank account?
An important corollary to this realization is that when people were buying houses with no money down, they never had to go through the calculus of how much money those houses actually cost, because they weren't putting their own equity into the deal. Now that banks are looking for 20% down payments, all of a sudden all those million dollar plus homes start to look less tempting to people here in Santa Monica and Venice when you start talking about $200,000 down payments that you might lose $100,000 (or more) of before we get to the bottom of the bubble.
And where people are getting a $200,000 down payment saved up in addition to the income to pay the mortgage, tax, insurance payments on the remaining $600,000, and still have the money left over for their luxury will always be a mystery to me. And those are for the starter homes!
These examples are just a mere amplification of what happens when someone buys a $1300 flat screen tv on credit and doesn't pay for it when the bill comes due.
@Sean Masters: But if we educated kids when they are small then the marketers would have nothing to market to when kids are kids and then grow up into their teenage years when they are most easily marketed to. I am sure there are companies out there that are pushing for less financial education in the classroom so that everyone will be pressured into buying the latest iPod and will think nothing of it.
@stevejust: I am of the use things until they wear out mentality. Buying a TV or car will depend on the situation you are in. Is your old TV breaking down (or perhaps its dead), or do you just want the latest model to keep up with the joneses? If its breaking down then its probably OK to buy it on credit, provided of course you have the means to pay it off in a reasonable amount of time. People who go out and buy the latest because they think a TV or a car is a status symbol rather than a functional product are the ones that will really be in the hole when that bill comes. Then how much of a status symbol will it really be? It will become a status symbol of debt!
You will have to buy stuff eventually, a car or a TV isn't going to last forever, they will last a long time but not forever. I see nothing wrong with replacing something that will soon need replacing or something that is dying. You will have to spend for these things at some point in your life.
Can't fix stupid!
@Lordstrom: It's easy to lay the blame on people for not saving more, but it's also important to keep in mind that wages have been flat or declining for years now. A lot of people simply don't have money to save.
Even if you are being responsible and trying to pay off your credit card debt, they have ways of making that more difficult for you. Changing terms for no reason. Lowering your limit so you are overlimit and then charging overlimit fees and jacking interest to 30%.
So yes, consumers bear responsibility for getting into credit card debt, but one of the biggest reasons they can't get out of debt is the credit card companies.
@stevejust: Pay cash for the car. You don't want to owe money on something that's declining in value. I've been there and it didn't feel good.
The main problem is that many of the people who need to be reading this kind of article are also most likely the non-intellectual type whose attention span for reading informative articles tend to be no longer than the local STOP sign. What's the point of writing these articles if the only people who are likely to read them are internet-savvy types with higher education backgrounds who usually have less of a predilection for taking on dumb credit card debt? I know I'm generalizing like a demon here, but I'd be surprised if it weren't true.
I can not handle credit cards. I think it's because I am a child from the '80's. When I was a pre-teen my parents would give me their credit card to go shopping. Free stuff...or so my young developing brain thought. I think credit cards were a experiment that has FAILED. Debit and cash for me!
Clearly, the solution is for Daddy Obama and Uncle Sugar to make the mean ol' credit card companies keep the teaser rate for as long as we carry a balance, and not charge us penalty or other fees, and keep companies from letting us buy too much stuff on our credit card.
Why should I take responsibility for myself when Chairman O can nationalize the banking industry, like he did for the automobile industry?
Can we stop calling people who don't know how to make good credit decisions "stupid"?? All that does is take the responsibility to EDUCATE EACH OTHER away from us. (Again with the blaming the victims, people!)
I went to high school and never learned a thing about credit cards. I opened bank accounts and never learned a thing about credit cards. I got student loans and went to college and never learned a thing about credit cards. I bought a house and got a mortgage...and never learned a thing about credit cards. When we allow a consumer product to grow this ubiquitous and powerful and *don't educate anyone* about how to use it, where do we get off being angry at the people who fall victim to it? That's akin to selling guns and leaving it up to the gun-manufacturers to provide whatever safety information they want, and then shrugging off all the injuries caused by the practice as the fault of "stupid people". ...There's stupidity in this scenario, alright, but it isn't just on the part of consumers!
Yes, my victory in self-educating myself about credit is *my* victory. I had no help and was provided no information, but I made sure I was careful and well-read, so I get to take credit for that. Of course, I also have to credit blind luck that I had access to the information, the research skills to find it, the knowledge that it was important, and the literacy to understand it -- which many people don't.
But the failure to educate everyone to at least a minimally-necessary-for-modern-survival level is society's.
THANK YOU!!!! for pointing that out!
Signed,
Every-time-I-have-extra-money-something-breaks!
This is an outrage! Our elected officials should show some real leadership and pass a law that makes it impossible for me to make bad decisions. I must be protected from myself by Papa O and his Numerous Nannies.
Stupid people will continue to be stupid. Got it.