People of Modest Means and Lots and Lots of Debt

by Henry Meier

No one should be surprised that younger people take on more credit card debt than older people, but a new research paper is getting a lot of attention this morning because of what it says about generational attitudes towards debt, in general, and credit cards in particular.  Specifically, the “estimated difference in pay off rates between generations shows the children’s payoff rate being about  24 percentage points lower than their parents and about 77 percentage points lower than their grandparents.”  Why is this significant?

Because it provides strong evidence that debt taken on by younger generations is becoming a lifetime burden and not simply a reflection of youthful inexperience to be paid off as earnings increase.  Another interesting finding from the study, which is sure to get the attention of the data-driven CFPB,  is that the single biggest motivator to paying down credit card debt is an increase in the minimum payment.  The researchers estimate that for each additional percentage point increase in minimum payoff rate on a credit card increases the average payoff rate by 1.9 percentage points.

There is a debate among economists about whether the country’s current economic malaise reflects the housing binge of the last two decades or more serious structural tension in the American economy.  This is good evidence for underlying structural tensions, folks.  When you take into account the cost of a college education and the absolute necessity for two-income earners in families, more people are committed to managing debt rather than eradicating it.  It seems to me that this trend will continue and that the most successful financial products will be those that emphasize cash flow over debt elimination.

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