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New Fed Study: When it Comes to Credit Card Debt, We Don’t Know What We Owe

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Brace yourself, big spenders, because we’ve got some bad news. According to a recent study by the Federal Reserve Bank of New York, Americans underreport their credit card debt by a lot. While they might be honest when it comes to mortgages, student loans and even bankruptcies, for whatever reason, their credit card numbers just don’t add up.

Much of our understanding of consumer debt is informed by the Survey of Consumer Finances, which polls American households about their debts. The Federal Reserve of New York went one step further, comparing the SCF’s borrower-reported data with what lenders say they were owed, derived from the Equifax credit bureau. Ideally, the two numbers would match up: for every dollar a lender reports being owed, someone admits to owing. Well, not so much.

More borrowed against than borrowing, according to surveys

While borrower- and lender-reported debts on student loans and mortgages were more or less the same, the discrepancies on credit card debt are staggering:

  • Only 50 percent of households reported having any credit card debt at all, even though credit card companies reported that 76 percent of households owed them money.
  • For every dollar lenders say they are owed, consumers admit to owing only 50 cents.
  • Even generously accounting for a number of factors such as debts paid off within a credit card’s grace period, consumers report only 63 cents to the dollar.

What’s going on?

Americans are surprisingly debt-savvy otherwise

Americans don’t seem to be have a hard time reporting debt in general. According to this same study, people accurately reported all other kinds of debt, such as mortgages, student loans, and even personal bankruptcies! You could make the argument that mortgage and student loan debts are more socially acceptable, whereas people are less willing to own up to credit card debt. But if so, why would those same people report an even more embarrassing bankruptcy?

“The lack of evidence of stigma from the case of bankruptcy might suggest that uninformedness, rather than stigma, drives the borrower-lender credit card debt reporting gap,” the report argues.

This finding has serious implications for both financial policy and financial literacy. The Federal Reserve’s surveys of consumer finances have an excellent reputation, and are widely thought to provide an accurate picture of the American financial landscape. It’s hard to make sound policy decisions when the nation’s credit card debt is twice what you think it is. And that’s avoiding the most pressing question: why don’t people accurately report their credit card debts? Unfortunately, here’s the most logical conclusion we can draw: many people just don’t have a good understanding of their credit card debt. Frankly, we can’t blame them.

Time to get schooled

At NerdWallet, we spend our days swimming in credit card terms and conditions paperwork. Even with all our nerdy expertise, we’ll be the first to tell you how confusing it can be to figure out payments, especially when you can’t pay off your balance in full each month. Unlike your mortgage or student loan debt, you have a lot of discretion on how much of your credit card debt you pay, and it has a more nuanced impact on your credit score.

In response to the Fed’s survey, we think it’s high time to get serious about credit card debt education. We want to make sure you know how to calculate your credit card balance. Of course, we really hope you’ll stay out of debt completely, but it’s important to know what you’re up against. And, if you’re already dealing with debt, the best thing you can do is get a clear picture of how to get out ASAP. Keep reading to see our answers to the three most important credit card balance questions.

How do I calculate my credit card debt?

Your credit card debt is composed of two parts: the principal and the interest. The principal is the initial amount that you borrowed. If you have $1,000 on your card that you’ve yet to pay off, the principal on your debt is $1,000. You don’t have all that much control over the principal, aside from staying out of debt in the first place: no matter what happens, you’ll have to pay back that initial $1,000.

The second component, interest, is what you have more control over. The longer you take to pay off your debt, and the higher your APR, the more interest you will pay over time. If your credit card bill for October is $1,000 and you pay it off during the grace period, you won’t pay any interest at all. On the other hand, let’s say you make only the minimum payment of $15. You could easily pay $600 or more in interest, bringing your total debt repayment to $1,600.

This is an important distinction when deciding how and when to pay off your debts. Spreading a $1,000 debt over two years sounds like a good idea, but do you feel the same if that $1,000 debt becomes $1,200 you have to pay back? And remember: if you don’t pay off your debt altogether, you’ll accrue interest on the unpaid interest!

What are some tips for debt management?

Know your debts. Sounds trivial, but as the Federal Reserve study shows, it’s not a given that people know their credit card debts. The study found that single people had a better grasp than households, potentially indicating that some married people aren’t aware of their spouse’s debts. If your finances are in any way enmeshed with another person’s, have periodic, frank conversations about money.

Have a repayment plan you can stick to. There are some debts that are fairly easy to manage. Your mortgage and student loan payments, for example, are pretty static and easy to budget in. Credit card debt is a little trickier, because the minimum payments are so low and interest rates vary across cards. We suggest making more than the minimum payment, and paying off your debts as quickly as you can without sacrificing too much. The “debt snowball” strategy has you paying off your debts in order of smallest to largest. But if you have a small debt on a low interest credit card, and a large debt on a rewards credit card with a high APR, you’ll end up paying more in interest payments with that strategy. To minimize the total amount you’ll have to eventually cough up, pay off your debts in order of highest interest rate to lowest.

Choose the right credit card. We say this a lot, but don’t get a rewards credit card if you often carry a balance. They can have APRs that are twice as high as those of low APR cards, and for the most part, you’ll lose more in interest payments than you’ll earn in rewards. But if you’re good about not carrying a balance, have a good credit score and pay off your debts within the grace period, go ahead and pick out one of the best rewards credit cards and take advantage of your financial fitness.

Get help if you need it. If you’re in serious debt, you may want to consider debt counseling or a balance transfer credit card, which allows you to consolidate all of your credit card debts onto one card and pay them off interest-free for a time. For more information on getting out of debt, check out our debt relief section in NerdWallet Advice. We’ve rounded up some great links with help from the Federal Trade Commission, the Department of Justice, and the Department of Education.