Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
George Mitchell, as a member of the Board of Governors of the Federal Reserve in 1966, began urging bankers to consider how "the computer can drastically change money and its use."
In the early 1970s a nationwide electronic funds transfer system was envisioned. The system would use individualized electronic identification cards and digitized bank accounts with merchants connected to them by telecommunication links.
But it wasn’t until the 1990s that credit and debit card use really caught fire.
Is going cashless a good thing? Not for most people, we tend to spend more when we buy things with a credit or debit card instead of cash:
“Drazen Prelec and Duncan Simester reported studies on this topic in a 2001 issue of Marketing Letters. In one study, they told that randomly selected participants in the study would be offered the opportunity to purchase tickets to an actual professional basketball game that had just sold out. These tickets were highly desirable. Participants were told either that they would have to pay in cash or that they would have to pay by credit card. They were asked how much they would be willing to pay for these tickets. Those who were told they would have to pay by credit card were willing to pay over twice as much on average as those who were told that they would have to pay by cash.” Art Markman, Ph.D., psychologytoday.com
Paying with cash, actually pulling the money from a wallet or purse is a vivid enough action to elicit a negative, and in some consumers a mildly painful, psychological reaction that’s absent when either a credit or debit card transaction takes place.
“The impulse dances inside the debt.” Jareb Teague
In addition there’s often a sensory glee caused by impulse buying that causes otherwise rational people to buy things they might not buy if they had to pay cash.
"When cash is out of the wallet you physically see it go, whereas with credit cards there's more of a delay between purchase and payment, so cash buyers tend to stick to the essentials." Richard Bialek, a former credit-card firm executive
There are an estimated 46.7% of US households carrying credit card balances, the average household credit card debt was $14,517 for the first quarter of 2012.
That’s down $2,000 from the same period in 2010 – a lot of recent headlines are talking up the “fact” Americans are finally paying down their credit card debt - are Americans paying down their debt?
No, charge-offs (the percentage of dollars owed that issuers have written off as uncollectable) account for a significant portion of credit card debt reduction. The charge-off rate rose to 10.7% in the second quarter of 2010, an increase of over 300% from the 3.11% in the first quarter of 2006.
Falling indebtedness is largely due to defaults rather than repayment, nerdwallet.com
Moody's Investors Service said the charge-off rate for U.S. credit cards (those 90 days or more behind on payments that are stricken from lenders’ record books) rose in April to 5.21% from 4.92% in March.
The payment rate - which shows the number of credit card users who have the ability to pay off their balance - slipped to 21.49 percent in April from 22.11 percent in March.
The three US credit bureaus maintain over 220 million consumer files - one in five of these consumers has bad credit.
Banks are again starting to ease their lending standards, this makes it easier for consumers to qualify for credit cards and according to Credit Card Select credit use is on the rise. The Federal Reserve reported 17.5 percent of banks said that a moderately larger number of consumers applied for new cards in the first quarter of 2012. Equifax just released consumer credit data indicating that the rate of newly issued bank cards increased by nearly 37 percent in February 2012 over the same time last year.
TransUnion says the average debt per cardholder equaled $4,962 at the end of Q1 2012.
26 percent of U.S. adults now report that they are spending more than they did one year ago.
The national average default rate as January 2012 stood at 28.6 percent, up from 27.9 percent two years earlier. The median rate also jumped, from 28.9 percent to 29.4 percent (Source: CreditCards.com survey of 100 leading credit cards, January 2012)
“Two economists, Annamaria Lusardi and Olivia Mitchell, have been studying financial literacy and the effectiveness of efforts to promote it for many years. The results are not at all encouraging. To take just a few of their examples, they asked the following questions of a representative sample of Americans over the age of fifty:
1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years how much do you think you would have in the account if you left the money to grow: more than $102, exactly $102, less than $102?
2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year would you be able to buy more than, exactly the same as or less than today with the money in this account?
3. Do you think that the following statement is true or false? "Buying a single company stock usually provides a safer return than a stock mutual fund."
Only 50% of respondents were able to answer the first two questions correctly and less than a third were able to answer all three. In a related study less than 18% of people surveyed were able to answer a simple two-period compound interest problem.” America's Financial Illiteracy, Thomas F. Cooley forbes.com
Eighty seven percent of teens report their parents are their main source of financial education. More than 50 percent of adults do not maintain a budget or track their expenditures and nearly three in ten report that the terms of their mortgage differ from their initial expectations.
More than two in five Americans grade themselves as C, D or F in their knowledge of personal finance – an admission they lack the know-how to make sound financial decisions for themselves.
Sallie Mae surveyed undergraduate students in 2009:
- 84% of the student population has credit cards, half had four or more
- 84% of undergraduates indicated they needed more education on financial management topics
The Jump$tart Coalition for Personal Financial Literacy published answers from a 31 question exam given to 12th graders touching on topics ranging from credit cards, car insurance, the stock market and home ownership.
The average grade on the first exam the Coalition gave was 57.3 percent, 60 percent is a pass. On the second exam, done in 2008, the average grade had dipped to 48.3 percent - three quarters of the 6,856 students failed while fewer than five out of every 100 got 75 percent (a “C” grade) or better.
The very recent Council for Economic Education “Survey of the States” report found that since 2009:
- Three fewer states require schools to test in the area of economics and one fewer state requires schools to offer a personal finance course
- States requiring that students be tested on personal finance concepts fell by almost half
- The number of states that test students on economic concepts fell to 16 from 19. That number stood at 27 in 2002
- The number of states that require a personal finance class fell to 14 from 15
- States that require student testing in personal finance fell to five last year, from nine in 2009
- Only 13 states require that high school students take a personal finance class to graduate
Individuals graduating from high schools in states that require personal finance education have higher savings rates and net worth as a percentage of their earnings than individuals graduating from high schools in states where financial education is not mandated. Integrating Financial Education into School Curricula, The Department of the Treasury
George W. Bush championed the concept of “an ownership society” when he was running for re-election in 2004. Bush extolled the virtues of giving individuals more control over their own financial lives, every family would own its own house and stock portfolio.
“These families were, of course, conservative, or at a minimum traditional and nuclear, consisting of a heterosexual married couple and at least two kids living in a stand-alone home with a yard, a car or two and a multimedia room with a flat-screen television. The latter was a new addition to this 21st-century simulacrum of the 1950s "Leave It to Beaver" idyll. But the dream was the same.
Such a country would be more stable, Bush argued, and more prosperous. "America is a stronger country every single time a family moves into a home of their own," he said in October 2004. To achieve his vision, Bush pushed new policies encouraging homeownership, like the "zero-down-payment initiative," which was much as it sounds—a government-sponsored program that allowed people to get mortgages without a down payment. More exotic mortgages followed, including ones with no monthly payments for the first two years. Other mortgages required no documentation other than the say-so of the borrower. Absurd though these all were, they paled in comparison to the financial innovations that grew out of the mortgages—derivatives built on other derivatives, packaged and repackaged until no one could identify what they contained and how much they were, in fact, worth.
As we know by now, these instruments have brought the global financial system, improbably, to the brink of collapse. And as financial strains drive husbands and wives apart, Bush's ownership ideology may end up having the same effect on the stable nuclear families conservatives so badly wanted to foster.” End of the ‘Ownership Society’, Zachary Karabell thedailybeast.com
“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt.” Henrik Ibsen
Is financial literacy a threat to politicians?
By Mark C. Schug, Dwight R. Lee and William C. Wood, jsonline.com
"About half of high school students say they've never learned economics in school; those who do often receive no exposure to the subject until their junior or senior years. Even fewer students ever take a course in personal finance.
That's not for a lack of desire on their parents' part: Polling shows that adults think financial education should start in the earliest years of schooling. And virtually all adults believe economics should be included in curricula, according to a poll conducted by the Council on Economic Education.
So what gives? State legislators could, after all, require the study of economics and personal finance at several grade levels. Having spent years studying economic education, though, our theory is that politicians responsible for the curriculum don't see much of an upside in voters who are economically and financially literate.
If large numbers of voters understood basic concepts such as scarcity, opportunity cost and incentives, it would change the way they evaluate political rhetoric. Students should learn that there is an economic role for government to play in a market economy when the benefits of a government policy outweigh its costs; they should also learn that the costs of many government policies exceed the benefits.
If large numbers of voters understood that governments can and do fail - and that they fail more often than markets do - they'd take a much different view of our monetary and budgetary policies. In an era of trillion-dollar deficits, it's an encouraging thought."
Consider the results of a 2008 study of teens participating in the financial education program Money Matters:
- 79 percent of teens who reported learning about goal-setting were significantly more likely to also report that they had saved money for something they wanted and then purchased it
- 72 percent of teens who reported learning about saving money were more likely to save regularly
- 50 percent of teens who learned to track spending were more likely to develop a budget
“Youth is in danger until it learns to look upon debts as furies.” Edward G. Bulwer-Lytton
Ignorance is a temporary condition easily cured by education.
Perhaps a little financial education, starting at a very early age, should be on all our radar screens. It certainly is on mine. Is it on yours?
If not, maybe it should be.
Richard (Rick) Mills
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