Professor Alexandra Sickler featured in Recent Study on Credit Card Debt

Document Type

News Article

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Campus Unit

School of Law


What daily behaviors lead people to amass credit card debt?

There are at least two typical behaviors that lead to unhealthy amounts of credit card debt. First, some consumers engage in impulse buying versus thoughtful, deliberate use of credit card within a monthly budget. Consumers should catalog their monthly purchases and evaluate whether these items are necessary purchases or not. They should also impose a waiting period on purchases that are not essential. Second, it is not always wise for consumers to use credit cards for everyday items, such as groceries and utility bills. It is tempting to use a credit card for this purpose, especially where a consumer can earn miles or other rewards, but she should avoid using her credit card in this way unless she strictly confines the use of her credit card to her monthly budget, and most importantly pays off the credit card balance every month. What is the biggest mistake people make when managing credit card debt?

There are many, but below I describe what I think are the two biggest mistakes people make in managing their credit card debt.

Lack of knowledge about applicable credit terms. Consumers often lack knowledge and understanding of the terms and conditions that govern their contractual relationship with the credit card company. Consumers should read the proverbial fine print, so they do not misunderstand the rates and other terms that apply to their card. A card may have a low, introductory rate that applies to new purchases and/or balance transfers for a limited period of time and another rate that applies once the introductory period has ended. Further, that higher rate may fluctuate because it is variable. But the interest rate isn't the only term of which a consumer should be aware. She should also know the grace period, the statement period, the balance calculation method that applies, and what fees the credit company can charge you including but not limited to an annual fee, a balance transfer fee, a late payment fee, an over-the-limit fee.

Making the minimum monthly payment instead of paying off the entire statement balance. It is tempting to send in only the minimum monthly payment, but a consumer should avoid this so-called debt management technique if at all possible. Credit card companies charge interest on the unpaid balance, meaning that a consumer's bill will keep growing every month. A $10 item can turn into a $100 item. A consumer should pay the entire statement balance every month, or send as large a payment as she can afford. How does the growth of credit card debt affect the economy?

A functioning economy requires consumer spending. And some borrowing and debt inevitably accompanies those expenditures. When consumers use their credit cards responsibly and within their budgets, the credit card debt has a positive effect on the economy because it allows growth in all the sectors of the economy that directly or indirectly serve consumers, like manufacturing and retail. But when consumers use their credit cards too much and are unable to pay their debts, the economy suffers because such consumers are unable to purchase homes, save for retirement, or save for other priorities, like college tuition for their children. What role, if any, should government play in incentivizing and encouraging people to maintain low debt to income ratios (e.g., through tax incentives, etc.)?

The government, as a regulator of the economy, is charged with encouraging an appropriate balance between consumer spending and saving. Too much of either is ultimately unhealthy. Consequently, some government regulation is necessary. Also, the government has a role to play in protecting consumers from lender fraud.