Why Many Young Americans May Die with Debt
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Younger Americans can expect to die with credit-card debt if their current spending patterns continue, a new study finds.
Co-authored by Ohio State University economics professor Lucia Dunn, the research suggests that younger generations may continue to add credit-card debt well into their 70s, and die still owing money on their cards.
"If what we found continues to hold true, we may have more elderly people with substantial financial problems in the future," Dunn said. "Our projections are that the typical credit-card holder among younger Americans who keeps a balance will die still in debt to credit-card companies."
The study found that consumers born between 1980 and 1984 have credit-card debt substantially higher than the debt held by the previous two generations. Specifically, they have on average $5,689 more debt than people, like their parents, born 1950 and 1954 at the same stage of life and $8,156 more debt than those born between 1920 and 1924, like their grandparents.
The data in the study comes from two large monthly surveys, the Ohio Economic Survey, which was conducted from 1996 to 2002, and the national-level Consumer Finance Monthly, which began in 2005 and is ongoing. The researchers combined the data to examine 32,542 consumers between the ages of 18 and 85 for the years from 1997 to 2009.
When the researchers analyzed data from the entire set of respondents at any one point in time, they found that credit-card debt increases at younger ages, peaks at middle ages and then tapers off at older ages.
In addition to incurring more debt, younger people are paying off their debt more slowly, too. The study estimates that the children's payoff rate is 24 percentage points lower than their parents' and about 77 percentage points lower than their grandparents' rate.
Researchers believe the study is significant because it is the first to use data on not only how much people borrow on their credit card, but their complete payoff information as well.
"Most data sets available to researchers only contain one side of credit-card behavior — borrowing," Dunn said. "We have data on how they pay off credit cards as well, which gives us a more complete picture of their debt situation."
Dunn attributes the higher credit-card debt among younger Americans to several factors.
"Credit is more readily available now, and there have been changes in interest rates and less stigma attached to having credit-card debt, which may all make younger people today more willing to go into debt," she said.
The researchers suggest one solution to the impending problem is to raise the minimum required payments each month. The study's findings showed that increasing the minimum payment by 1 percentage point increased the average payoff rate by 1.9 percentage points. That would mean, when paying only the 2 percent minimum payment each month on a balance of $1,000 at an interest rate of 19 percent, it would take more than eight years to repay the balance in full. That's compared to less than two years when paying a monthly payment of 5.8 percent.
"Raising the minimum payoff rate can have a powerful effect on how people actually pay off their credit card debt, much more so than you might expect," Dunn said.
Dunn said that an increase in the minimum payoff rate may give a psychological jolt to cardholders.
"They may see the increase in their minimum payment and start feeling uncertain about their future ability to pay off their debt," she said. "That may encourage them to pay off even more than they have to, in order to bring their debt level down."
As a whole, Dunn said the said the results should concern all Americans.
"If our findings persist, we may be faced with a financial crisis among elderly people who can't pay off their credit cards," Dunn said.
The study, which was co-authored by Sarah Jiang of Capital One Financial, appears in the January 2013 issue of the journal Economic Inquiry.