The Science of Personal Finance

New Cultural Norm: Too Much Debt

Despite consumers' general acknowledgement that they should limit credit spending, many – especially the young – take on significant debt because doing so has become the norm, new research suggests.

In a recent study, researchers concluded Americans suffer from a lack of financial literacy that forced many to learn, often the hard way through personal experience, about credit card use and debt.

One of the researchers, Oregon State University Assistant Marketing Professor Michelle Barnhart, said their case studies showedmany who struggled with debt never discussed with parents the issue of credit spending, or finances at all.

"It was kind of a taboo subject," Barnhart said. "It was a topic they really avoided."

The findings will be detailed in the December issue of the Journal of Consumer Research.

Credit score nightmares

Many of the people studied did remember receiving a credit card from their parents, Barnhart said, and being told to use it only in an emergency.

 "That was the extent to what their parents taught them about credit," Barnhart said. "Then they hit a world where they have to have a credit score to do everyday things."

The nation's increasingly heavy reliance on credit scores – which now are required for essential things like renting an apartment, leasing a car and even purchasing a cell phone – has made credit spending much more common today then in the past.

"It is no longer just a negative," Barnhart said of credit spending. "It is something that is helping you build a better life."

However, the struggle of determining what kind of spending can help and what kind could hurt caused many to suffer financially overall.

Barnhart, who conducted the study with Lisa Peñaloza of Ecole des Hautes Etudes Commerciales du Nord of France, said half of those studied had debt they were unable to pay – and one-third of them were dealing with collection agencies.

"The majority of our younger participants had trouble with credit," Barnhart said. "They found themselves in a scary situation."

Teach the kids!

To get kids pointed in the right financial direction, Beth Kobliner, author of "Get a Financial Life" (Fireside, 2009) and a member of the President's Advisory Council on Financial Capability, said it's important for parents to start teaching their children about money and finance as soon as they are able to start saying "I want that" or "Gimme."

"Of course you don't have to get into the nitty-gritty of compound interest, but you can explain that there are things we want and things we need," Kobliner said. "You can explain that we have to make choices, and sometimes we have to wait for things we really want."

Kobliner recommends parents use everyday moments, like going to the grocery store or playing in the park, to teach habits that form the foundation of a healthy financial life.

"Little children might not understand tax-deferred growth or mutual funds, but they can grasp concepts such as spending, making choices, sharing, and waiting," she said.

Never too soon

And when it comes to discussing actual credit spending, Kobliner said the earlier the better.

She suggests bringing the kids along when visiting the ATM – a trip that can be used to explain that money isn't free and to discuss what a bank is for and what a credit card is.

 "Talk about how a credit card has to be paid in full every month or you wind up paying more," Kobliner said.

The study's findings were based on case studies conducted with 27 white, middle-class Americans in 2006.

This $ci-Fi article is part of an ongoing LiveScience series that explores the science of personal finance to help you navigate everyday life.

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