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31 Oct 2011

How Much Do You Owe? Guess Again

Debt No Comments

John Vaughan (Financial Advisor) @ Lucid Living

It would appear that Americans don’t even know how much they owe.

Households underreport the magnitude of their credit card debts by at least one-third, according to a new study from the Federal Reserve Bank of New York. The difference for the average household is more than $2,000.

Only 50 percent of households reported any credit card debt, while credit card companies reported that 76 percent of households owed them money.

They found that consumers gave accurate testimony about most kinds of debt, including mortgages and student loans, but not when asked about credit card debt.

In fact, borrowers reported owing only about 50 cents for each dollar claimed by credit card lenders.

The average household reports credit card debts of $4,700, while lenders report an average balance per household of $7,134.

Why do people underreport the magnitude of their debts?

Embarrassment is an obvious candidate, but there are a couple of problems with that explanation. First, people accurately report other categories of debt, like  mortgages and student loans. Of course, those are the kinds of debts people are encouraged to carry. Still, it is possible that embarrassment plays a role.

Another partial explanation: Individuals report their credit card debts more accurately than households, suggesting that people may be ignorant of debts run up by their partners. This difference, however, does not come close to explaining the magnitude of the discrepancy.

And that leaves ignorance: The possibility that Americans simply don’t know how much they owe.

“Uninformedness,” the paper notes (bringing a new word into existence), “could result from willful ignorance, as large credit card balances are not welcome information, from difficulty understanding the growth of credit card balances,” or from other barriers to knowledge.

Interestingly, there is some evidence that underreporting has declined in recent years, perhaps as a consequence of a crisis that has forced households to pay more attention to their debts.

Do you know how much debt you have? This is not a trick question – banks and other lenders know exactly who and what you owe!

That information is a “click” away.

Its all in your credit report. Get yours now – by clicking here!

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