Americans Have Not Learned Their Lessons Despite The Recession

by Hank Coleman

Many Americans are still not learning from the mistakes of the past two years according to a new survey by Harris Interactive that was commissioned by Lending Club, the peer-to-peer lender. A lot of people continue to ignore what were once touted as hard-learned credit lessons from the recession. Many have continued to carry high interest credit card debt, large amounts of debt, and do not know how to improve their credit scores. The scariest part of the survey comes when the panel shows just how uneducated there are on financial matters.

High Interest Rates. While most people, according to the study, know the interest rates that they are receiving on their credit cards, 31% of those surveyed have an interest rate of 20% or more. And, 64% pay over 14% in annual interest rates on their credit cards and other consumer loans. Despite many of the financial experts discussing options, 65% of the panel did not even bother to ask for a better interest rate from their credit card company. If you buy a $500 Apple iPad on a credit card with a 14% annual interest rate and pay only the minimum 2% of the balance each month, you will wind up paying $637 including interest. And, it would take you almost four years to pay off your new gadget.

High Credit Card Debt. The Federal Reserve said last week in the latest Consumer Credit Report that Americans slashed their revolving consumer credit which includes mainly their credit card balances by approximately $7.4 billion in May. That decline represents an annual reduction of 10.5% of consumer debt. But, the decline is nothing but smoke and mirrors. The debt has not gone away. The banks have just given up on ever getting that money back from its consumers.

Charging Off Our Debt. Borrowers have not actually been paying banks back like you would think. Banks have been moving debt from one accounting column on their books to another. They have been charging off a lot of debt as uncollectible. According to the Federal Deposit Insurance Corp, $18.7 billion of credit card debt was written off by banks, which accounts for roughly 96% of the drop of credit card debt balance seen in the first quarter.

Haven’t Increased Our Financial IQ. In addition to asking the study’s respondents about their credit card interest rates, Harris Interactive asked the 2,401 subjects different personal finance questions to gauge their knowledge of how their credit score functioned and what affects it. And, the results were not pretty. For example, the panelists were asked, “What effect, if any, do you think each of the following actions would have on your credit score?” 34% of people said that it would increase their credit scores, and 26% said that it would not have any impact at all.

Frugality Will Not Stick Around. Frugality has the staying power of the pet rock and the mini disc player. It is my personal opinion that frugality will soon be forgotten from our collective conscience like a bad episode of Three’s Company or 3rd Rock From The Sun. It will soon be relegated to cocktail party fodder and something that we tell our grandchildren that was once in vogue when times were tough in the Great Depression part two. Don’t get me wrong. Frugality will come and go like a bad penny. It will keep turning up, but it isn’t here for good. We will revert to our old ways of spending and excess.

You would think that we would be a smarter group of people considering the financial hurricane that we have all been through over the past two years. But, the truth of the matter is that we have not learned our lesson from the recent recession. We are not smarter about credit, debt, and the role our credit score plays in our lives. Our lack of learning from our past mistakes is the real reasons that we continue to have recessions and will continue to do so in the future.

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Money Obedience July 13, 2010 at 11:31 am

All we have learned is exactly the same thing that lead to troubles in the first place: when things go bad, the authorities will bail us out. We live under the illusion that the Fed or the governments are mighty enough to handle any economic problem coming our way. So, why would we want to reduce debt, live by a budget, and do other sensible things?

Hank Coleman July 13, 2010 at 7:02 pm

You have a good point. The government rewards people for exactly the wrong things such as taking out big loans for homes and then rewards us in the form of a tax deduction for mortgage interest rate. If they really wanted to spur home ownership and reduce American consumer debt, then the government should change the incentive structure rewarding those who put more cash down, etc.

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