Lies About Credit Card Debts!


[This post is written and copyrighted by FIRE Finance (http://firefinance.blogspot.com).]

Credit CardsThis June (2007) creditcards.com published a benchmark study titled "Taking Charge: America's Relationship with Credit Cards [1]". The findings presented were the results of a 1,000 phone surveys conducted from March 5, 2007, to March 12, 2007, by Roper Public Affairs and Media, a part of GfK NOP. This study gives an idea about the credit card debt of an average American household and some credit related behavioral trends. To quote them:
"By some estimates, the average American household has over $9,300 in credit card debt. Yet, despite Americans’ concern about their spending habits, few people are willing to own up to their balances: over 90 percent of survey respondents believe they had the same amount – or less – debt as the average American. This makes a revealing statement about America’s complex relationship with credit cards."
The figure "$9,300 in credit card debt" for an average American household is not the issue here. The issue is about the correctness of this poll's results. They might be distorted either intentionally or unintentionally. But why? A probable answer might be that a high average credit card debt might make the average crowd feel that their credit card debts are okay (aka in tandem with the national average) or perhaps their credit card debts are low so they can borrow more! Now we have got more questions:
  • Is it ethical to publish polls whose results might not be correct?
  • Do these results delay folks with credit card debts from realizing that they are on the road to financial ruin?
  • Should there be a governing body or group who will define the standards for calculating results from accumulated data using correct approximation methodologies from the domain of probability and statistics?
Ms. Liz Pulliam Weston, a reputed personal finance advisor, believes that the figures presented in the poll (described above) are distorted. She writes in details about it in her article titled "The big lie about credit card debt [2]" at MSN. Armed with figures from a triennial survey in 2004 [3], she brings forth the following points:

  • The majority of U.S. households have no credit card debt, according to the Federal Reserve's latest Survey of Consumer Finances. About a quarter have no credit cards, and an additional 30% or so pay off their balances every month.
  • Of the households that do owe money on credit cards, the median balance was $2,200 - meaning half owe more, half less.
  • Only 8.3% of households owe $9,000 or more on their cards.
The next triennial survey will be held in 2009, so we cannot immediately bolster Ms. Weston's claims with current data. But she has a valid point when she states that:
"But the numbers don't change that much from survey to survey. The median balance has crept up over the years; in 2001, it was $1,900. But the percentage of those who owe a balance versus those who don't stays pretty much the same, as does the percentage carrying hefty credit card debts."
The distortion might have been caused by skewed data or the different methodologies used by the various agencies to come with figure for the national credit card debt for an average American household. To explain the skewed data we quote some simple examples:
  • Ms. Weston explains it as:
"The example I usually give to illustrate the fallacy of averages is to imagine that you and 17 of your friends were having dinner with Bill Gates and Warren Buffett. The average net worth of a person at that table would be about $5 billion. The fact that everybody else's personal net worth was a lot less wouldn't affect the average that much because Bill and Warren are so much wealthier than the rest of us."
  • Professor Bob Lawless in his article "How Much Credit Card Debt Per Household?--I've Lost $531 Billion [4]" provides another simple analogy:
"Personally, I like the anecdote about the person with one foot in a bucket of ice water and another foot in a bucket of steaming hot water, but who's OK, on average. The same point would be true for a small number of households with a huge amount of credit card debt. They would skew the average amount of debt owed."
After studying the data presented in the various surveys [3], [5], [6] we have a feeling that in general the financial health of an average American household is not that bad. In our opinion the average credit card debt figures around the median of $2200 appears probable. Also we feel that that most Americans are responsible enough to be aware that they need to be in a good financial health and thus act accordingly. The scary statistics of an average American household carrying a debt of $9300 is hard to believe! What are your opinions? We would love to hear back from you, please do leave your comments.

References

[1] CreditCards.com: "Taking Charge: America's Relationship With Credit Cards"
[2] Weston, Liz Pulliam: "The big lie about credit card debt"
[3] 2004 survey of Consumer Finances
[4] Lawless, Bob: "How Much Credit Card Debt Per Household?--I've Lost $531 Billion"
[5] Bucks, Brian K, et al: "Recent Changes in U.S. Family Finances: Evidences from the 2001 and 2004 Survey of Consumer Finances"
[6] Federal Reserve Release G.19 Consumer Credit

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