A new study published in April that throws light on consumers’ credit habits shows a need for increased financial literacy, even in America’s white middle class. However, one of the study’s authors says the need is not as much for more information as it is a need for consumers to take the time to make informed, rational decisions about their spending habits.
Most of what they need to know is not where to put the decimal point,” says Professor Michelle Barnhart of Oregon State University, one of the study’s co-authors. Instead, it’s to scrutinize the key points in one’s life to determine what’s really valuable – and how our belief systems influence the choices we make in how to handle credit.
The study, titled “Living U.S. Capitalism: The Normalization of Credit/Debt,” will be published this December in the Journal of Consumer Research. The research subjects were 27 white, middle-class Americans, all from a major Midwestern city, who were interviewed in 2005 and 2006. Barnhart and Lisa Peñaloza of Ecole des Hautes Etudes Commerciales du Nord, a premier French business school, wanted to explore some of the attitudes, perceptions and cultural meanings behind how Americans view and use debt and credit, and how those attitudes and actions may have contributed to the economic recession. This case study, while a small sample, was able to ask detailed questions to probe into deeper issues within American society.
Interviews conducted before the financial crisis show inherent weaknesses in decision processes that would not serve people well when hard times hit. Researchers found that even though consumers espouse that they should limit their debt, they take on significant debt because doing so has become normal. As one participant put it, taking on debt is “the American way.”
In 2008 alone, Americans spent 9.3 percent of their income servicing debt, according to an article written that year by Michael Wood, which noted that credit card debt was rising as other funding sources dried up. And in 2010, more than 24 percent of homes in the United States had an upside-down mortgage – owing more than the homes were worth – according to a U.S. Federal Reserve report published in March of that year.
Barnhart and Peñaloza’s research yielded a few key findings, including:
• Americans suffer from a lack of financial literacy. Every participant said they had learned about credit card use and debt primarily through personal experience. Very few had received any training in school or at home, and most participants said they didn’t discuss family finances with their children.
• About half of the 27 participants had debt they were unable to pay and one-third of them were dealing with collection agencies.
• Participants often talked about credit as a measure of worth, noting that if they were approved for a certain loan they were “good enough for that car.” Statements often indicated that approval for big-ticket items such as cars and homes were directly related to a value of the person. “You know, your credit card is what you think you are worth, but it is really not,” said a 27-year-old study participant.
• Those who had credit cards and paid them off each month tended to be older, and had higher incomes.
Several of the younger participants in the study noted that they did not want to use credit, but felt they had to in order to finance cars and homes in the future. Most of the younger participants also were encouraged by their parents to have credit cards, and started using credit at a much younger age than those older than 50.
Barnhart, who is an assistant professor of marketing at OSU, said much of the research done on cultural behavior and attitudes leading up to the economic downturn has focused on ethnic minorities and low-income minorities. However, she said it has been some of the most educated and privileged of Americans who have engaged in risky financial behavior.
An example of unintended consequences is parents’ frequent advice to their children that a credit card should only be used in an emergency. “The parent’s intention was good,” she said, “but when you have a credit card for an emergency, you don’t need to have a savings account for an emergency.” The result: debt that’s incurred quickly, and which gets repaid slowly.
“Over time, credit card use and heavy debt has become normalized in our culture,” she said. “Even though we say as a society, ‘don’t get in debt,’ the overwhelming messages being sent out – from the way credit is used to approve or disapprove us for services to political leaders telling us to spend after a big disaster to prove our patriotism – all of this has created a culture of debt.”
That debt culture isn’t kind to those who try to avoid it. One of the few young participants to not carry any debt said she felt punished for her refusal to have a credit card. She was refused a cell phone, and had encountered embarrassing situations during business travel because she did not have a credit card. Barnhart said this system of penalizing consumers for not using credit is one of the problems.
Barnhart would like to next do a study about how norms, values and habits have changed since the economic crisis. However, she said financial literacy is still the missing link in American society. She and Peñaloza believe that financial literacy classes should be required in schools, and that these classes should not only address credit card fees and compound interest, but also critique debt as a cultural value. The concept of “good debt” – the kind that supports an investment in one’s future, such as paying for an education or buying a house – can obscure fundamental weaknesses in reasoning. Those in the middle class are apt to think that they must go to college, or must own a house, to be part of the segment of society to which they desire inclusion. But what if the degree financed with loans doesn’t lead to a well-paying job (or any job, for that matter)? What if a person’s economic situation is too unstable to support living in a purchased home long enough to make back the closing costs, let alone build equity?
Consumers need to get a better understanding of how the credit system works, and where its vested interests are, Barnhart said, in order to work within that system to advance their own interests. And they also need to ask the hard questions about which of their life decisions will generate actual value for them.