Tuesday, May 12, 2009

The Real Problem With Credit Cards Is...You!

I came across this article in Time magazine today talking about some interesting events and trends surrounding the credit card industry. The gist of the article is that although it is easy to blame the credit card industry for America's debt problem, it is not very accurate.

Credit-card companies, though, may not be the only ones we need to be protected from. Every penny of Americans' nearly $1 trillion in revolving debt started with someone — some individual person — whipping out a piece of plastic and making a decision to use it. We could consider that free will and just call it a day, but there's plenty of reason to believe the story isn't so simple. There are piles of evidence that people are bad decision makers when it comes to how they use credit cards. Even when presented with full and fair information, they often make decisions that are not in their own economic best interest — a reality only partly taken into account by the new rules and pending legislation.

The reason this article caught my attention is that it does a great job of addressing the psychology behind our money decisions. The economic right answer isn't the answer we as humans always make. And when poor decisions are made where do we point the finger? Generally not towards ourselves which, as illustrated by this article, is a problem.

The lack of personal responsibility regarding credit cards (and/or most other issues for that matter) brings to light an inherent flaw in the way of thinking we have towards government. Whenever something happens socially we feel the need to add legislation to "fix" the problem. The problem is that legislating lenders does nothing to change the behavior of the consumer which is ultimately the root cause of the problem to begin with. A lender with atrocious terms and no willing borrows is pretty harmless. Much of the legislation seeks greater disclosure so people can make better educated decisions but that doesn't seem to help either.

"There have been a lot of disclosure policies over the past 20 years, but they've had a limited effect on improving the market," says the University of Maryland's Ausubel. "The problem isn't in the availability of information. The problem is in the processing of the information."

I think that most people suffer from information overload. If you step back for a second, all you really need to know about a credit card is that you need to pay back whatever you borrow or you will begin to pay interest. That interest can compound in just the same way your investments can, only in the wrong direction! APR's, teaser rates, etc. don't really matter if you pay off your balance.

Inherently people know this simple truth. As a kid not many people grow up taking more out of their piggy bank than they put in thinking they are becoming rich. However, knowing is not enough. It is doing that truly matters. If knowing how to stay out of credit card debt was the answer then I would argue that most people wouldn't have any credit card debt. It's a lot more difficult to do than merely to know.

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