Cigarettes and Credit Card Debt

 
Thanks to SuperFantastic for this photo.

What do they have in common?  Did you ever ask yourself how many times someone had to read the warning label on a pack of cigarettes before they got the message that these things aren’t good for you?  Well, here’s a warning label that we see repeated over and over and we just hope that at some point people start paying attention that credit card debt is not good for you.  I’m not moralizing here, sometimes it is necessary to use a credit card to purchase something that is needed but the plan needs to be to pay it off as quickly as possible.

MBA (6/5/2007 ) Palaparty, Vijay
Nearly half of Americans, 48 percent, are not comfortable with the amount of household debt they have, according to a national survey commissioned by LendingTree, Charlotte, N.C.

Fifty-four percent of those surveyed in the study, Living with Debt, report not having a financial plan. However, individuals continue to view homeownership as an important part of their overall financial equation.

The report showed strong belief in home equity as a financial stabilizer and an asset that provides security for many participants. Many respondents reported that uncertainties in the stock market combined with increases in home valuations led them purchase a home as quickly as possible.

Excluding mortgage debt, 74 percent of respondents envisioned themselves being completely debt-free at some point in their lives, the report said.

“This is great news but based on what we learned from the survey respondents, we’re unsure how many will stop being a slave to debt payments and make a change to their current lifestyle,” said Bridget Smith, editor-in-chief of LendingTree’s Smart Borrower Center.

Fifty percent of respondents reported moderate to extreme concern over the amount of credit card debt they have, and 10 percent chose to declare bankruptcy as the only outlet to debt problems.

“These are startling results indicating some borrowers don’t seem to know how the differences between good debt and bad debt and have little idea how to choose the right path toward financial freedom,” Smith said.

The study examined debt at different stages of life and also distinguished different levels of debt acceptance, tolerance and rejection between generations.

Young families with adults between ages 19 and 34, with children, had the highest debt-to-income ratio—59 percent reported they spend more than half of their gross income on total debt expense. Sixty-eight percent exhibited signs of being the most uncomfortable with their household debt. Young families also showed a lack in savings—59 percent reported that they do not have savings available for an emergency.

“Young families struck us as having the biggest debt quandary on their hands,” Smith said. “What’s really unfortunate is this group is young and they are raising families with debt that they simply do not understand how to manage and this could manifest into a generational pattern.”

In terms of spending, young families showed high expenditure on mortgages. Forty-five percent of respondents said they spend 35 percent of their gross income on mortgage payments. Additionally, 62 percent said they have more than $3,000 in credit card debt, of which 29 percent have more than $10,000. Also, 64 percent of young families reported not having a financial plan in place.

“Living with increasingly higher levels of debt has become an accepted and normal state of affairs—it is considered an inevitable and likely permanent feature of everyday life,” said Robert Manning, economist and professor of finance at Rochester Institute of Technology and research author.

He said the traditional attitude toward accumulating debt has changed, especially among younger generations, and the idea of savings is diminishing with many feeling pressured to spend for immediate gratification.

Among college students, credit card and student loan debt is high and the report showed that this group is most unprepared to deal with personal financial matters. Few college students connect their immediate credit history with future financial decisions, of which most are unaware.

Young singles under the age of 35 were reported to have high amount of accumulated debt because of recent graduation from college and at the entry point of their income trajectory. Interestingly, in metropolitan areas where high housing appreciation is a factor, young singles viewed home ownership as a long term investment as well as a permanent place of residence.

Mature families with adults between the ages of 45 and 64 showed characteristics of being “savers,”—individuals adhering to traditional financial values of savings and planning for the future. Even so, this cohort was most often reported to have college-related expenses for their children and beginning a savings plan for retirement.

Empty nesters, also between the ages of 45 and 64, are focused more on increasing retirement wealth. However, this group faces rising health care costs and lingering financial ties with their children, the report said.  Senior citizens were reported to face the most expenses for healthcare costs while holding on to traditional financial values and financially supporting their children and grandchildren.

“The ‘democratization’ of credit means it’s never been more important for borrowers to arm themselves with knowledge and build sound financial management skills in order to maximize the benefits and minimize the risks of these new opportunities,” the report said. “Many consumers lack the information and understanding necessary to make smart decisions regarding credit. The desire for education and information on better managing debt was clear among nearly all life stages.”