Americans are racking up debt again, but still don’t get their finances

Colin Lalley 1600


Colin Lalley

Colin Lalley

Associate Content Director, Home & Auto Insurance

Colin Lalley is the associate content director of home and auto insurance at Policygenius, where he leads our property & casualty editorial teams. His insights have been featured in Inc. Magazine, Betterment, Chime, Credit Seasame, Zola, and the Council for Disability Awareness.

Published April 20, 2017 | 4 min read

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So...things are good, right? Everyone’s doing good? I mean, outside of unending political protests, people getting dragged off United flights, Uber losing nearly $3 billion in a year, this $400 juicer being outsmarted by people just squeezing the juice with their hands...Despite the much-ballyhooed 4.9% unemployment rate and near record-highs in the stock market, there are signs of trouble brewing beneath an economy that can appear feverish on the surface.

This February, consumer credit card debt crossed the trillion-dollar mark for the first time since 2008. But that was a great year for everyone, financially-speaking, so what’s the harm? But hey, at least we’ve all learned a lot since the Great Recession!Or have we?Some experts think the astronomical credit card debt is a non-issue, because the delinquency rate at the end of 2016 was below the 15-year average and the average debt-to-income ratio is lower than it was before the recession."It’s a good sign," says a chief economist at FTN Financial. "We’re being a lot more responsible with than we were 10 years ago."Still, it’s hard not to imagine our freshly mounting debt as the "This is fine" meme.

Rising credit card debt could be the canary in the coal mine because, taken with other financial aspects, it doesn’t seem like we’ve learned a whole lot about our finances in the past decade.

Americans really don’t understand money

In 2014, the Atlantic reported on a survey aimed at gauging comprehension of some basic financial principles. Published by two economists with the American Economic Association, the quiz asked simple questions about what interest rates would do to your savings in different contexts, and asked about the return implications of a single company stock compared to a mutual fund.Only 30% of Americans got all three questions right.That’s concerning. People need to know how interest rates can increase their savings. They also need to know how interest rates affect what they’ll owe on loans and other debt. Knowing the basics of investing – that diversified funds provide a safer return than individual stocks – is also helpful.

This is money management 101. These aren’t things you need to know if you’re Warren Buffett; they’re things you need to know if you have a bank account and plan on buying a car or a house or retiring one day. "People have increasingly high credit card debt, but it’s fine," becomes less convincing when less than a third of Americans can tell you what interest rates do to that debt.But one data point does not a trend make. Maybe Americans were having an off year. Obamacare went into effect and we were all worried about death panels. The U.S. men’s soccer teams underperformed in the World Cup (again). We messed up one financial quiz – so what?In 2015, FINRA reported that only 37% of respondents got at least four out of five questions correct on their National Capability survey. The number of people who got three answers or fewer correct rose each year from 2009 on.This year, a quiz on financial longevity for retirees had an 80% failure rate.And when PolicyGenius ran a survey last year asking respondents to define basic health insurance terms – terms that would have a big impact on what people actually paid for healthcare – only 4% could correctly define, deductible, copay, coinsurance, and out-of-pocket maximum.Americans failing financial literacy quizzes isn’t a one-time event. It’s a regular occurrence, and just because we’ve more or less bounced back from the Great Recession doesn’t mean that we’ve suddenly become financial savants. And with credit scores about to improve thanks to a simple change in calculation, consumers are likely to get a false sense of confidence. The problems just aren’t overt as the used to be.

Credit cards aren’t the only source of high debt

Credit card debt topping a trillion dollars isn’t great. What makes is worse is the fact that is’ only one member of the "Trillion Dollar Debt Club".Student loan debt is similarly high, with the latest statistics putting it at $1.3 trillion. Auto debt is at $1.2 trillion. If there’s one silver lining, it’s that credit card debt isn’t that high.And this debt looks a lot worse when you pair it with other financial insights.

Real median wages have barely risen in decades. Unemployment is low, but potentially misleading. According to the Economic Policy Institute, "nearly half of families have no retirement account savings at all." Forty-seven percent of people can’t cover a $400 emergency expense.America’s financial situation certainly isn’t as dire as it was ten years ago, but it wouldn’t be farfetched to say we’re still in the midst of recovery. Mounting debt paired with persistent financial illiteracy creates precarious economy, a recipe for the next crash.Is amassing debt really "a good sign"? Millennials are already putting off the traditional tenets of adulthood because adulthood is really, really expensive. What happens to everyone else if – when – all of this debt comes crumbling down? Survey after survey shows we don’t know what the implications of our money really are.Mounting debt, lukewarm economic increases, and a poor understanding of money will almost certainly hurt Americans, and most people won’t even see it coming.This is fine.