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.
The paper has the discomfiting consequence of raising questions about the accuracy of the Fed’s Survey of Consumer Finances, widely treated as an authoritative source. The authors compared the debt levels reported by participants in that survey with data that lenders reported to the Equifax credit bureau. 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.
There are plausible explanations for part of the difference. In particular, people who pay the full balance on their cards each month – lenders call such customers “convenience users” or, more colorfully, “deadbeats,” because they do not pay interest and therefore are less profitable — may not regard that balance as “true” debt, and therefore choose not to report it. The industry, however, simply reports the total volume of outstanding loans. (Lenders, after all, have no way to know which loans will be repaid at the end of the month and which loans will stay on the books.)
The authors overcorrect for this possibility by subtracting all transactions made in the last year, as if everyone paid their bills each month. They also make some other adjustments, including subtracting an estimate of the debt that consumers put on their credit cards for business purposes, on the theory that some people may also place this debt in a separate category.
Even with those changes, however, 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. But people also accurately report personal bankruptcies, which would seem more embarrassing. Still, it is possible that embarrassment plays a role; the authors note evidence that people tell small lies more readily than large ones, perhaps explaining why people are less willing to lie about filing for bankruptcy.
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.
