The new bill supporting financial literacy education introduced in the Senate recently may be a response to a recent survey that quantified apparent American ignorance in matters of money.
The survey presented 1,000 people with a hypothetical scenario about credit card debt and asked them to compute how long it would take to pay it off. Only 35.9% of the 1,000 respondents could figure out how many years it would take for the amount they owe on their credit cards to double. A full 18.2% did not know how to respond and 31.9% of those surveyed over-estimated the timeframe…
Harvard Business School Professor Peter Tufano, a self-proclaimed believer in financial education, does not see credit as inherently bad, but he said that debt services are much more complicated now than they were a generation ago. He said credit card companies could help by creating more consumer friendly credit contracts that plainly spell out the terms, and bills that itemize outstanding debt so consumers can grasp the reality of how they spend money and how long it will take to pay.
Credit cards often use four very specific techniques, and customers are usually not aware of how these work. They are often not explained until after you apply for and are approved for a credit card, if at all.
Two-Cycle Billing. If you carry a balance one month, you’ll be charged interest for your average daily balance over two billing cycles rather than the average over just the period of time past the “grace period.” If, after carrying a balance, you pay your bill in full, you might end up owing even more money for interest even after you think your card is fully paid off. If you don’t notice this, you will begin to owe further interest on that carried-over interest.
Universal Default. This practice has been highly criticized and a number of credit card companies have dropped this, but you often won’t know until this happens: If you are late on a payment for one credit card and the issuer decides to charge you a higher interest rate for default, other unrelated credit card companies can decide to raise your rates as well.
Over-Limit Fees. In the past, credit cards had hard spending limits. If you tried to charge beyond what the amount the company decides is an acceptable credit risk for you, your transaction would be declined. Spenders have grown accustomed to this crutch, but now, some cards allow you to charge beyond your limit — but will slap you with a fee for doing so.
Due Times. You know what day of the month your credit card payment is due, but some cards also have a “due time.” The due time will invariably be before that day’s mail is sorted and delivered at the lender’s payment processing location. It’s bad enough customers have to deal with changing due dates, but credit card users should err on the side of being early, even with electronic payments.
These are only minor issues, however, when “typical” Americans (according to the survey) don’t understand concepts like compound interest.
Befuddled by debt? You’re not alone [CNN Money]
Updated May 26, 2009 and originally published March 5, 2008.