Americans are drowning in debt – that is not news. What is news is the fact that the situation may be driven by a lack of understanding, especially among millennials, about credit card debt, according to Clever Real Estate's 2019 Financial Literacy Survey.
“Despite multiple economic crises -- including the longest and most severe recession since the Great Depression -- and stagnant wages, Americans never seemed to pump the brakes and surpassed $4 trillion in debt this year,” said the survey from the nationwide, digital real estate association. “The average American household now holds $31,428 in debt, which calculates to 40% of the median household income.”
When asked general questions about debt, credit scores and credit cards, survey participants only “answered 67% of the questions correctly, with the highest scores on questions about credit scores (74%), followed by credit cards (66%), and more general loans (61%). If our survey was a college exam, our students would have earned a solid D,” Clever said.
Further the survey found that “baby boomers performed the best, but they were a far cry from star-student status with an average score of 76%; and millennials trailed sluggishly behind at 56% correct.” For instance, 60% of millennials did not know the definition of "interest," and millennials were three times more likely than baby boomers to believe that checking your credit hurts your credit score. The information was compiled from Federal Reserve and Census data supplemented by a survey of 1,000 adults.
Advisors can help clients close some of these knowledge gaps, said Francesca Ortegren, researcher at Clever and author of the report.
“It’s important for advisors to stay up to date on the available financial education and trends in debt so they can better relay information to their clients,” Ortegren said. “More specifically, it’s clear that many people don’t get proper training or education related to personal finances, which could certainly play a role in irresponsible borrowing and makes people vulnerable to predatory lending situations. Therefore, focusing on education might thwart some of those habits.”
The bad spending habits that advisors and consumers have to overcome are substantial, according to the survey. In 2018, the median household had $31,420 of debt relative to a median income of $78,646. The survey showed that slightly more than half of Americans break even or spend more than their income each year and more than 70% of credit card users do not pay their credit card balance off every month. Americans paid $113 billion in credit card interest and fees in 2018, up from $74.5 billion in 2013.
The changes that resulted in this casual attitude toward borrowing started in the 1950s and led to an avalanche of debt and a lack of knowledge about it. The introduction of revolving debt and credit cards led to overspending, Clever said. The amount of interest and fees on credit card debt that is not paid off each month increased by 50% in the last 15 years.
“The upward slope in debt accumulation across the United States could be a sign of trouble to come,” Clever said. “Americans are taking on more and more debt and living well beyond their means. The easy access to credit cards and their potential to cause financial problems is exacerbated by a general misunderstanding of finances.”
Ortegren said, “Some ways advisors can help with education is to provide straight-forward education to clients and direct them to more in-depth, credible education opportunities online or in the community. When it comes to credit card debt specifically, advisors can focus on education that teaches clients about interest rates and fees associated with credit cards.”