Have Consumers Learned from the Recession?
By Marcia Frellick
April 12, 2012
Recession-weary consumers are ready to put their credit cards, debit cards and prepaid cards back to work, studies show.
Consumer confidence in March 2012 reached its highest level in more than a year, according to the latest Thomson Reuters/University of Michigan consumer sentiment index, and improvement in the stock market and job market has put people in a spending mood.
Yet although consumers are ready to charge, recent studies on financial literacy show that they are no closer to managing their finances responsibly than they were before the recession.
More spending with the same bad habits is “a recipe for disaster,” says Gail Cunningham, vice president of the National Foundation for Credit Counseling (NFCC). The NFCC, along with Network Branded Prepaid Card Association, recently released its 2012 Financial Literacy Survey, which delves into how people approach their finances. Here’s what’s troubling Cunningham:
- Sixty-two percent of consumers have not reviewed their credit reports in the past 12 months.
- Nearly two in five Americans (39 percent) carry credit card debt from month to month — a number that has been consistent since 2010.
- The proportion of adults who do not pay all their bills on time has increased from 28 percent in 2011 to 33 percent in 2012.
- Two in five adults (40 percent) say they are now saving less than they did last year. Nearly the same proportion (39 percent) do not have any non-retirement savings.
- Most adults –56 percent — don’t have a budget
Why these unhealthy attitudes? For one thing, the word “budget” makes people recoil, Cunningham says. People don’t budget because they think of it as restrictive – but that’s the wrong outlook.
“A budget isn’t something that controls you,” Cunningham says. “You control the budget. But people don’t see it that way. The only way to be in charge is to track your spending.”
Cunningham says she finds not checking a credit reports particularly perplexing. You can do it for free at AnnualCreditReport.com, she notes, and it’s easy to access reports from the three credit reporting agencies online or by phone. Without your reports, you don’t know how you look on paper to lenders. It’s also a way to uncover any signs of identity theft.
“It’s a letter about you that is being circulated in the financial community, and you need to read it and understand what it says,” Cunningham says.
In addition to not knowing what’s in their credit reports, a substantial number of consumers in the NFCC survey said they didn’t know much about their finances in general. Forty-two percent of respondents gave themselves grades of C, D or F when it comes to personal finance knowledge — significantly more than the 34 percent who gave themselves those bad marks in 2010.
A lack of personal finance education in kindergarten through high school is at the root of the problem, says Nan Morrison, CEO of the Council for Economic Education (CEE). Parents haven’t been educated about finances, and the children who look to them for help are missing out as well.
The CEE’s “Survey of the States” report, released in March, found that only 13 states require students to take a personal finance course (or an economics course that features personal finance) as a high school graduation requirement. These states make up approximately 25 percent of the U.S. population, which means almost 75 percent of Americans have not received financial literacy education in schools.
“We’re not really moving ahead and maybe even falling behind a bit,” Morrison says.
A new survey of financial literacy on five college campuses may prove her point. Financial knowledge gaps were abundant in the survey “Financial Literacy and Credit Cards: A Multi Campus Survey,” published in April 2012 in the International Journal of Business and Social Science.
According to the survey, 70 percent of students had at least one credit card, but few knew the basics on using them.
- Only 14.6 percent of the surveyed students claimed to know their interest rates.
- Only 9.4 percent of credit-card-carrying college students paid off their debt in full each month.
- A strong majority (75.7 percent) weren’t aware of late payment charges on their credit cards.
Asking for help
There is some good news in these troubling survey results, says Karen Carlson, director of education for InCharge Debt Solutions in Orlando, Fla. — more people are willing to admit they don’t know enough about money.
That has never been an easy thing for people to admit. But after a housing bust and a credit crisis, “It looks like we’re finally there,” Carlson says.
Getting people to take the first steps toward understanding their finances is the next challenge.
Any consumer can start tonight, Carlson says, by looking at credit and debit card statements. Spend some time identifying what you’re spending money on, and identify any interest rates or fees associated with the cards.
Also, find a free community-based financial workshop, Carlson suggests. They are offered by libraries, churches, community groups and nonprofit credit counseling services in most cities. If in-person doesn’t work for you, equivalent information and free programs are available online.
The honesty of the financially clueless represented in the surveys is a welcome development after years of over-confidence, Carlson says. She likens it to the day you realize your clothes don’t fit and that you’re tired of carrying around extra weight. You decide to step on a scale. The result may be shocking, but it’s the first step toward getting healthy.
“Before we can address our financial vulnerabilities, we need to know what we don’t know,” Carlson says.