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Expert Opinions

Troubling projections for credit-card debt in 2015 are dangerously close to unsustainable levels not seen since the Great Recession. We asked a panel of credit experts to shed light on the irresponsible credit behavior that leads to such negative results and the effects of such mistakes on the overall economy. Click on the experts’ profiles to read their bios and thoughts on the following key questions:

  • What daily behaviors lead people to amass credit-card debt?

  • What is the biggest mistake people make when managing credit-card debt?

  • How does the growth of credit-card debt affect the economy?

  • What role, if any, should government play in incentivizing and encouraging people to maintain low debt-to-income ratios (e.g., through tax incentives)?

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Benjamin J. Keys

Assistant Professor in the Harris School of Public Policy, University of ChicagoWhat daily behaviors lead people to amass credit card debt?

Credit card debt accumulates when households spend money faster than they earn it. For households who expect their incomes to rise in the future, it might make sense to accumulate some debt, although credit card debt may not be the cheapest option. Households that accumulate credit card debt in the long run may do so because their income hasn't lived up to expectations, and they can't actually afford the lifestyle they have been living. On the other hand, credit cards can also serve as a valuable line of defense against emergencies, like medical bills, car repairs, or unexpected shortfalls in income.

The challenge with managing credit cards is that there is a disconnect between when you purchase something and when you are required to pay for it. This disconnect separates the pleasure of consumption from the pain of repayment, and makes it easier to spend now and put off repayment in the future. But putting off the repayment of debt is what has significant interest costs; there's no cost to repaying your balance in full each month, if anything that builds your credit and can lead to cash back or rewards.

In my view, understanding individuals' self-control problems is crucial to understanding indebtedness. Economic models that incorporate limited self-control, known as "present-bias," do a much better job capturing the microeconomic and aggregate patterns of household debt. Because the line of credit on a credit card is so easily accessible, at stores or on the internet, individuals with self-control problems would be more tempted than ever to buy things that they don't necessarily need or would later regret buying.

What is the biggest mistake people make when managing credit card debt?

A household that is carrying a large credit card balance may be mis-managing their finances on two fronts: First, they may be purchasing more than they can afford, and second, they may be repaying their debts too slowly. Research has shown that individuals have limited financial literacy and, in particular, dramatically underestimate the power of compound interest. Consumers might not realize that every month they fail to pay their credit card off in full, interest is being compounded on the outstanding balance, and this adds up quickly.

In terms of repayment, my research with Jialan Wang has shown that consumers' repayment choices are significantly influenced by the required minimum payment. Repaying the required minimum, usually around 2% of the outstanding balance, keeps the card in good standing with the issuer and avoids any late fees. However, this is an extremely slow pace of repayment, and unlikely to be the optimal repayment speed for anyone who is actively trying to get out of debt.

What we've shown in our research is that many consumers recognize that paying only the minimum is not sufficient, but that the location of the minimum influences the extent to which consumers repay their debts. Using variation in required payments generated when issuers change their minimums, we find that roughly 10% of all consumers behave as though the minimum acts as an "anchor" in making their repayment decisions, and that these consumers would repay their debts faster (and would not default) if required minimum payments were increased.

How does the growth of credit card debt affect the economy?

By some accounts, the growth of credit card debt since the late 1970s can explain most of the decline in the national savings rate. In the 1960s and 1970s, consumers kept a buffer stock of savings in case of emergencies, but now people treat the unused portion of their credit card limit as that same buffer. And that choice has implications for banking, finance, and household stability. In particular, it means that any time a household confronts an emergency, they are paying interest to address the emergency, rather than simply drawing down their savings. It also means that consumers are especially reliant on credit access during recessions.

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.)?

There isn't a one-size-fits all guideline for appropriate household debt-to-income ratios. The CARD Act took important steps to limit obscure and deceptive fees, but as the CFPB has recently pointed out, card agreements are long and complicated, and no one reads them anyway. Some cards are designed to hide the true costs of borrowing, such as by allowing deferred interest payments. These back-loaded contracts are especially problematic for consumers with self-control problems, and were all-too-common in the subprime mortgage market from a few years back, a credit boom-bust cycle that we'd rather not repeat. So there are still some steps to be taken to improve disclosure and help consumers better understand the cost of revolving debt and compounding interest. Making it easier to price compare and an individually-tailored shopping experience, to shop for the card that fits with a household's prior usage (in terms of interest and fees), is another helpful step that the government could facilitate.
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Alexandra P. Everhart Sickler

Assistant Professor of Law at University of North Dakota School of LawWhat 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.
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Roderic Hewlett

Dean of the College of Business at Bellevue UniversityWhat daily behaviors lead people to amass credit card debt?

The problem is both behavioral and institutional.

Behavioral because people confuse needs and wants.

Institutional because government and finance enable consumption of wants. Institutional because popular culture glorifies consumption and the cult of current consumption versus long term investment. Institutional because the rhetoric of government calling consumption an investment.

The various statistics support these notions. People have always wanted more, they must be institutionally enabled to consume more than their income allows.

What is the biggest mistake people make when managing credit card debt?

Misunderstanding the power of compounding. It can work for you or against you. The current problem is that the real rate of compounding for saving is negative and encourages consumption. Retirement accounts reflect this behavioral reality; people are rolling into retirement woefully unprepared - they overestimated government support for their retirement and underestimated the power of saving and compounding to meet future needs. Most importantly, the revealed preference of people demonstrates a high current versus future orientation, i.e., consume versus invest.

If one would only realize that credit is a claim on future income, and actually reduces future standard of living, they would appreciate the saving versus consumption trade-off.

How does the growth of credit card debt affect the economy?

Boosts current consumption (GDP) at the expense of future consumption. That is why the government bubbles the economy through easy credit to improve current GDP. The problem is the bubble and debt-income ratio creates the next recession.

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.)?

Basically, the government should stay out of it - they are the problem, not the solution. This is a matter of individual choice and understanding, not public policy. The government, at all levels, is in debt beyond their means of capitalization - they cannot manage government affairs, much less citizens' private debt.
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Laura A. Beal

Lecturer in Finance, Banking and Real Estate at University of Nebraska OmahaWhat daily behaviors lead people to amass credit card debt?

Many consumers are focused on immediate gratification; it is very easy to pull out the plastic and make instant purchases. Online retailers are making it very easy to buy. For example, Amazon.com has the 1-click order feature.

What is the biggest mistake people make when managing credit card debt?

I think the biggest mistake people make is not having a plan. They don't stop and think about a budget, and can easily lose track of their spending habits. This can also affect their FICO score which tells lenders about the credit-worthiness of the consumer.

How does the growth of credit card debt affect the economy?

Credit card use has increased substantially over the years which can help drive the economy, but also play a part in its downfall, as seen in the 2008 financial crisis stemming from easy credit for home mortgages. It is much like a double-edged sword. Consumers need to be smarter about good debt vs. bad debt so that the economy will not suffer another credit crisis.

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.)?

It would be great to offer tax incentives to households that maintain low debt to income ratios, although I think it would be difficult to track this and it would be subject to manipulation/fraud. Perhaps regulations on credit card companies to reduce credit limits/rates. The latest Federal Reserve quarter percent hike has led to increases in the yield charged on credit cards -- consumers may not even notice. More transparency and communication between lenders and consumers should be required.
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Amanda H. Christensen

Assistant Professor in Family & Consumer Sciences at Utah State University Morgan County ExtensionWhat is the biggest mistake people make when managing credit card debt?

You're making a mistake if you're not using "power payments" as part of your plan to manage credit card debt. Power payments significantly reduce the amount of time and interest you pay to eliminate debt. There are apps which can help you develop a personalized, self-directed debt elimination plan, free of charge. Discover how quickly you can become debt free, and how much you can save in interest costs by following your debt reduction plan.
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Catherine Lau

Assistant Professor of Accounting, Finance and Economics at Carthage CollegeWhat daily behaviors lead people to amass credit card debt?

There is a theory in economics involving consumption smoothing: individuals gain utility (satisfaction), from consuming similar amounts over their lifetimes so borrow when their income is low and then repay and save when their income is higher. This is part of Milton Friedman's permanent income hypothesis.

This hypothesis is one reason people amass credit card debt: for some reason they are experiencing lower income but know they will have higher income in the future so they borrow now and repay later. Of course the issue is: how certain are they that their income will improve in the future? How good is their access to credit and at what interest rates?

A less positive outlook on the reasons behind amassing credit card debt would include keeping up with perceived peers/neighbors: studies have showed that our perception of what we "need" or desire is relative; if people around us have more disposable income we may borrow to keep up. People also amass debt due to illness and divorce. Credit card debt was high in 2006. During the recent recession, the amount of credit card debt decreased, probably a combination of consumers pulling back as their outlook got gloomier and banks tightening standards. To the extent consumers borrowed less because their expectations for overall lifetime income decreased, the permanent income hypothesis is supported. If they borrowed less due to temporary loss of income, the hypothesis is not supported. However, some of the pull back was due to banks tightening credit standards/lines.

As far as daily behavior, I think that people who don't budget get into bad spending habits. I am doing some work with a financial literacy group and there does seem to be some evidence that people get into trouble when they spend as a reward for putting up with some of life's unpleasantness: the "you deserve a new pair of boots" is not really good advice from a friend.

If people don't understand the time value of money and the impact of high interest rates but instead focus on minimum monthly payments they can dig themselves into a hole.

How does the growth of credit card debt affect the economy?

Growth in credit card debt can be positive for the economy as long as the economy is growing: consumer spending is a big part of our economy. However, if consumer debt grows rapidly while the economy is expanding, but contracts sharply when the economy contracts, it can contribute to volatility, especially if the expansion is not true growth but caused by an asset bubble as in the housing market.

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 tax code encourages debt via the mortgage interest deduction. The private sector to some extent rewards people with low debt to income through lower interest rates. I am in favor of adding personal finance to high school curricula, but then I am in the education business.
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John T. Longo

Founding Attorney for Citadel Consumer Litigation, PCWhat daily behaviors lead people to amass credit card debt?

Some people just overspend irrationally believing they will be able to pay off the cards. But most of the people I see as a consumer attorney get into trouble with credit cards because things come up in their lives and they have no savings to rely on. For example, they lose their job and start paying for groceries, gas, car insurance and other necessities with their credit cards.

What is the biggest mistake people make when managing credit card debt?

They ignore the growing bill as long as they can make the minimum payment. When the card is maxed out, they are sometimes forced to admit they have a problem but other times they just make things worse by starting the cycle with a different card. The saddest cases I see are people who have depleted their 401k, or taken out home equity loans, to make credit card payments and they still end up bankrupt. If those people contacted an attorney earlier, the attorney could have explained they could have gone bankrupt and wiped out the credit card debt without sacrificing their retirement money and the equity in their home.

How does the growth of credit card debt affect the economy?

On a macro level, it might be good. But on the micro level I deal with, it sucks too much money out of people who can least afford it. By that I mean people who live pretty close to paycheck to paycheck.
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James Murray

Associate Professor of Economics at University of Wisconsin - La CrosseWhat is the biggest mistake people make when managing credit card debt?
  1. Carrying positive balances over from one month to the next. Credit card interest rates can be extremely high. The national average interest rate charged on credit cards plan carrying balances was 14% in August last year. That's the average. It is not uncommon for credit cards to charge interest rates in excess of 20%, and sometimes they can get even higher. In 2009, a national bank offered a credit card with an interest rate of 79.9%. Compare these to the current bank prime rate (the interest rate banks charge on the most credit-worthy customers) of 3.5%; the average 30 year home mortgage interest rate of 4%, or the average interest rate paid out on savings accounts equal to 0.06%.

    Because of the very high interest rates, many people will give the advice to completely pay your entire credit card balance every month. It's good advice, but possibly extreme. My advice would be to think carefully about the necessity and sustainability for any purchase you make on a credit card which will not be paid off immediately. Sometimes unexpected and unusual expenses come up that need to be paid, and this may be the only way to pay it. When you carry that balance with the credit card, you will pay significantly more than the price of this expense, and continue to pay for it every month that the balance isn't paid.
  2. Amassing credit card debt with routine expenses. This is unsustainable and can lead to a large stock of credit card debt and significant monthly payments that will do little to pay down your credit card balance and much to decrease your ability to afford the things you need in the future. Popular routine expenses that may end up being purchased on a credit card include things like gasoline, food, restaurants, clothing, phone bills, and cable bills. If you can't afford to pay for these things without your credit card, then you can't afford them. This will catch up to you.
How does the growth of credit card debt affect the economy?

This drags down consumer demand for final goods and services and consumers' ability to save. Both of these create a drag on long-run economic growth.

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 financial incentive is already there and it is already significant. Amassing credit card debt is already not good for consumers. The spending that consumers may enjoy while amassing credit card debt will only be temporary, and the significant burden of high debt and high interest rates that will eventually follow can drag on people's long-term financial well-being for years to come. That many consumers regularly fall into this trap suggest that financial incentives alone are not always enough to change people's behavior. More effective interventions may instead be to better educate the public on financial management.

Some of the problem may be due to larger problems that lead to poverty and income inequality. The Census Bureau's official measure of the poverty rate in 2014 was 14.8%. Over 2010-2014, the poverty rate was largely unchanged, but it is up by 2.3% as compared to 2007, before the most recent recession. Income inequality has been steadily growing for decades along with what economists call labor market polarization, which is a relative shrinking of businesses' demand for hiring for middle-income jobs and a relative increase in demand for hiring for low-income and the highest-income jobs. Causes and policies to address poverty and income inequality is an open and active debate.
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Paul R. Woodburne

Associate Professor of Economics at Clarion University of PennsylvaniaWhat daily behaviors lead people to amass credit card debt?

People conflate 'want' and 'need'. Societal and advertising messages tell us to spend when we want something. Having a credit card is important as credit scores are used by myriad companies in situations unrelated to credit. Having said that, I tell my students to use cash whenever possible. Using cash hurts as it leaves your pocket. See below about the 30% extra spending and hyperbolic discounting. Cash puts limits on what you can spend.

Various studies have been done on senses of well-being in different income strata. Generally, if your reference point is relatively poor people similar to you, your self-esteem is not too bad, and there is less desire to use consumption to make yourself feel better, or to show that you are better than your peers. Consumption is not individual, as economic theory suggests. Consumption is social. Sociologists such as Pierre Bourdieu suggests in his interesting 1984 work, that social status is gained, lost, and reproduced in part through everyday acts of consumer behavior. Juliet Schor has a very interesting little book "Do Americans Shop Too Much?", which I use in my Consumer Economics class. In this book she details how the conventional assumptions of economic theory are not followed by actual people. When information exists about lifestyles of people better off than you are, ("Lifestyles of the Rich and Famous", the beginning of TV showing higher income people, etc.) then poorer people are more likely to try to emulate what they see as the norm, or what is seen as 'good'. Credit card debt is one way this is attempted.

If people do not have enough income to make credit cards nothing more than short term interest free loans, then debt is amassed very easily. High rates compound this, and the fallacy of hyperbolic discounting comes back with a vengeance.

People are very poor at planning and knowing what their future spending will be like, even just a few days/weeks in advance. Given poor planning abilities, it is unsurprising that we rely on a very easy mechanism to fill the gaps when something unexpected arises.

What is the biggest mistake people make when managing credit card debt?

Generally, people use credit cards to maintain a standard of living when the income has changed. Some of this is blame-worthy, and some is not. You cannot quickly alter your car payment or home payment or rent. Expenses such as these tend to be fixed and dependent on past income. If someone loses a job, they can't automatically reduce their rent/car/etc. payments to a level commensurate with new income levels.

Incomes have fallen (unemployment has risen) for middle income/working people. This is even worse for those on even lower income rungs. Thus, the 'mistake' is to have too little income. Assuming you can reduce your lifestyle, move to smaller home or apartment, sell the car and get a different one that costs less, etc., then you need to be very disciplined to limit spending when life is already very hard and you want a little luxury in your hard life. It is very hard to break spending habits. It is a matter of psychology and views of self-worth. Society gives us incessant messages to spend; that we can 'win' the holidays if we only spend enough, etc. It takes a very disciplined person, when income is already very low, to maintain manageable debt levels.

People also are guilty of 'hyperbolic discounting'. Economic rationality suggests that people will realize that an 18% interest charge on their purchase will raise the real cost of the item, and that realization would cause people to pause before using their credit card. Actual behavior tends to show that people see the interest charges occurring far in the future, and discount those expenses to almost nothing.

People tend to spend 30% more when they use a credit card vs. cash. Thus, credit card companies love it when people use their cards.

People often are guilty of thinking of the monthly payment ("I can afford $20 a month for the couch on my department store card"), as opposed to thinking of the real cost (see above), or the real limits of their income.

Current research in actual brain function and psychology indicates that humans are particularly bad at managing things like money. Our brains are not good at it. Daniel Kahneman (Nobel prize in economics in 2002) Amos Tversky, and Richard Thaler and other pioneers in behavioral economics have done much work on this.

How does the growth of credit card debt affect the economy?

Like any debt, it is good, in that it raises consumption (which is 2/3 of the American Economy). Also, like any debt, when the debt/income ratio gets too high, consumption cannot be maintained, and it collapses. Because the debt is leverage, the decline must wipe out that leverage as well, so the decline is worse than if the upswing was not fueled by excess debt.

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.)?

Government policy should be aimed at the purveyors of debt, not on the consumers of debt. At the end of the day, behavior is yours to control, but given how people's brains are very poor at all aspects related to good money management, it seems criminal to allow credit card companies to have essentially free reign to take advantage of consumers' built-in biases and inabilities to correctly calculate, to make money.

There is a vibrant industry teaching kids and adults about credit and good credit maintenance. I was involved in this industry for nearly a decade. After approximately 30 years, there is essentially no change in consumer behavior/knowledge. This tells me that it is not an issue of teaching. The built-in biases and brains structure are too strong. Thus, the impetus for governmental action should not be aimed at consumers at all. Certainly tax incentives are too far away, too abstract, and too susceptible to the hyperbolic discounting noted above to be useful.

Credit card issuance should be heavily regulated. Terms should be very clearly indicated, and should be uniform in the industry. Bankruptcy rules for consumers in specific situations such as experiencing job loss should be loosened to allow for automatic alignment of payments with new income levels. Banks ought to not be able to offer multiple cards to the same people when anyone can see that their income can't handle it. Interest rates on cards should be reduced by 10-15 percentage points. This would incent the issuers to give credit to those who can afford it, and not to trap those in low income brackets in perpetual repayment cycles. Indefinite boosts in interest rates charged on cards for late payments should be reduced to a dedicated term, such as 6 months. Boosts in interest rates charged on cards due to missed payments on items unrelated to credit card debt (such as utility payments) should be outlawed and eliminated.

The predatory lending industry should be abolished or very heavily regulated. They prey on the most vulnerable citizens and trap them in never ending debt.
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Sahar Bahmani

Assistant Professor of Economics and Director of the Center for Economic Education at University of Wisconsin at ParksideWhat daily behaviors lead people to amass credit card debt?

One of the common daily behaviors that lead people to amass credit card debt is spending above and beyond their means. This may seem like common sense but often times people will do this out of habit therefore I urge people to think about their purchase and if it is more of a need versus a want. Another common behavior leading to credit card debt is not following a budget. Unfortunately, people do not make a budget and those who do often times will not stick to that budget which is very problematic.

What is the biggest mistake people make when managing credit card debt?

The biggest mistake people make when managing credit card debt is paying late which really hurts your credit score. Therefore I urge people to monitor their credit score regularly. Another common mistake people make is not saving up enough money in their emergency fund to cover expenditures that they may encounter; this is very problematic.

How does the growth of credit card debt affect the economy?

The growth of credit card debt affects the economy greatly because it impacts people's marginal propensity to spend. When people are not able to spend as much this has a negative impact on the employment rate, the unemployment rate rises and this has a cyclical effect.

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.)?

People can maintain low debt to income ratios by keeping their credit limits to a low. This only requires a simple phone call to your credit card company to bring down that amount. The government can help maintain low debt to income ratio's for people by not permitting banks to lend too much money to people, as we saw with the Great Recession of 2007, so we really don't want to make the same mistake again where banks were lending too much money to people who were not the most credit worthy.
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Lamont Black

Assistant Professor of Finance in the Driehaus College of Business at DePaul UniversityLamont BlackWhat daily behaviors lead people to amass credit card debt?

There are two very different sources of credit card debt. Some debt is the result of financial necessity, such as medical bills, that can only be paid for with credit. Some debt is the result of excess spending, which is a result of people living beyond their means.

What is the biggest mistake people make when managing credit card debt?

The biggest mistake people make when managing credit card debt is not paying it down whenever possible. Credit card debt is expensive. Although it is sometimes needed to get through a tough spot, it should never be carried along indefinitely. People with long-term credit card debt should try to develop a budget with a focus on paying off the debt.

How does the growth of credit card debt affect the economy?

The growth of credit card debt can be good for the economy in the short-term. More consumer spending will cause the economy to grow more quickly. But too much credit card debt will eventually become a drag on the economy. People will become unwilling or unable to spend when their debt gets out of control. This can lead to a reduction in consumer spending in the long-term. During a recession, unsustainable credit card debt can also lead to widespread credit card defaults.

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.)?

I think the government can play some role in incentivizing wise behavior, but policymakers should always be wary of unintended consequences. For instance, we would not want to punish people who need to increase their debt to income ratio due to some form of hardship.
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Suzanne K. Hayes

Associate Professor of Finance at University of Nebraska at KearneyWhat daily behaviors lead people to amass credit card debt?

One issue is the pace of electronic transactions. We live in a world where instant gratification is commonplace. With a quick card swipe we are able to purchase goods and services at brick-and-mortar stores. Online commerce is rapidly increasing; purchases are made with the expectation of same day or next day delivery at very low cost. Product information and accessibility is at our fingertips. Speed of transactions leads to impulse buying. The ease of purchases leads to an over-accumulation of debt for many individuals.

A second issue is a disconnect between the electronic entry for the purchase and the dollar value of that amount. The cognitive reasoning is different when a purchase is made with a quick card swipe where actual payment is delayed versus the purchase that requires physically withdrawing cash from a wallet.

What is the biggest mistake people make when managing credit card debt?

Credit card debt problems begin when balances are carried over without a specific repayment plan. A practice of not paying the balance in full each month starts a cycle of nonpayment. However, the original problem occurs prior to receiving the bill. Responsible credit card usage requires adherence to a budget and a priori decisions about acceptable credit card purchases. Decisions must be made before the card swipe, not when the bill arrives. Individuals can personally decide what categories of transactions are acceptable (fuel, food, entertainment, apparel, etc.), prepare a monthly budget, and have a repayment plan in advance of all purchases.

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.)?

Credit cards are increasingly marketed to young adults. Individuals in this age group may lack the financial knowledge and maturity to appropriately manage credit card debt. Education increases financial literacy; I believe a personal finance course should be required content for all high schools, community colleges, and universities. In addition, regulations should be enacted to prohibit credit card companies from on-campus solicitation. Freshman orientation is not an appropriate time to make credit available to young adults.