Consumers continue to struggle to make wise financial decisions, and they have the debt to prove it. Just how much credit card debt does the average American have? While the numbers vary widely, let’s use TransUnion’s 2014 calculation of $5,596 per US adult with a credit card (excluding unused cards and store cards). Using that amount, if a card holder stopped accruing debt and made monthly payments of $300, it would take him almost two years to pay off the balance. If he made only the minimum payment each month, it would take him more than twenty years to pay off the debt. In that time, he’d also pay almost $8000 in interest.
Credit card debt is expensive, but that painful hit to our pocketbooks hasn’t stopped us from accruing more and more of it. To make matters worse, more than half of Americans don’t have a rainy day fund, and they haven’t saved for retirement or their children’s education.
Why is it so difficult for us to make good financial decisions?
- Consumers may not be financially literate, and even if they are, most aren’t “financially capable” of making wise decisions.
In “3 Insights: Financial Literacy Is Not Enough,” George Hofheimer (Chief Research & Innovation Office at Filene Research Institute) makes two key points about why consumers don’t make sound financial decisions:
- Many consumers lack basic financial literacy, and they may not even know what they don’t know. In fact, credit unions and their members may be speaking two separate financial languages. Members don’t understand words like “annual percentage yield” or “debt ratio.” They only understand that they “need a car to get to work,” and they need the money to buy the car.
- Even if they have basic financial literacy, they still may not know of or be capable of implementing strategies to spend wisely or save money for investments, education, or retirement.
- Credit cards have encouraged spending.
Over the decades, card issuers have offered all sorts of incentives to entice consumers use their cards and pay the fees. As Brett King explains in “Why Smartphones Will Kill Credit Card Rewards,” rewards programs for credit and debit cards “are designed to encourage you to spend, even when doing so carries a high cost. The economics of rewards programs are pretty simple – companies employing them wouldn’t use rewards unless these programs were highly successful in generating more than enough revenue to pay their way.”
King also points out that up to one third of consumers fail to cash in their credit card rewards points annually, which amounts to $205 of lost savings per consumer, and credit card companies’ margins of profit have relied on the fact that many consumers don’t claim their rewards.
Smartphones, mobile technology, and app usage could help!
Research from CloudZync shows that the average consumer has six different loyalty programs on their smartphone, and King contends that those apps on smartphones will help consumers claim their rewards, which will in turn increase costs and decrease profits for credit card companies. In this way, King says smartphones could kill rewards programs entirely. He says, “The self-aware customer won’t make spending decisions based on cash-back, miles or trinkets offered – they’ll make spending decisions based on whether they can afford to make a purchase.”
To inform those purchasing decisions, consumers are turning to personal financial management (PFM) tools that help them understand and manage expenses, retirement accounts, credit cards, and other accounts. PFM’s like Mint let you create budgets, set goals, and it warns you if you are not sticking to your guns. Mint will also suggest financial products that help you meet your goals (like lower-interest credit cards or higher-interest bank accounts).
When integrated with mobile banking, bill payment functionality, and mobile discounts (sent via location-based push notifications – “Receive a nearby discount at Kroger”), all of these tools inform consumers of how much money they have, what they can afford to spend, and when they can afford to spend it.
Credit unions that work these tools into their line-up of offerings and teach their clients how to efficiently manage their money are investing in their clients’ futures and building loyal relationships that last a lifetime.