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Recently with so much discussion going on about college debt, I wanted to see if there was any scientific research on factors that might affect the amount of debt a person is carrying. I came across a study published in 2006 that sheds some light on this matter. This study was published in the Journal of Applied Social Psychology (Vol 36(6) (Jun 2006), pages 1395-1413). It surveyed 448 students from five colleges in three states.

Financial Literacy – In the study, financial literacy was one of the most important predictors of debt. Researchers, using the JumpStart Scale, found the more financial know-how you have, the less likely you will have credit card debt. Surprisingly, the researchers also found that college students were not better informed about finances than high school students. Solution: Increase your financial literacy by reading blogs like this Lending Club blog.

Number of Credit cards – The researchers also found that the more credit cards you have the more likely you are to be in debt. Even if you are financially literate and think debt is bad, the level of debt will be higher just because you have many credit cards available to you.

Solution: Carry only one credit card with you. Cut up or put away all of the other credit cards, depending on your situation.

Attitudes toward possessions and spending are also predictors of how much debt you will have. Being more careful about what you buy and where you spend your money can influence how much debt you have.

Solution: Think before buying something and putting the purchase on a credit card.

The study also found that women and men did not different in their debt habits. Age, as expected, did account for differences in behavior. Older students were better at debt management. Students were also found to be very optimistic about the ability to repay their debt and the future income they would generate. The research also determined that in general the students were all equal with regard to the debt risks that they face.

Ready for a money reality check? Take this challenge from the Jumpstart Coalition and see how you do!

Regular readers of the Lending Club blog know how often the problems with credit cards are discussed here. Credit Card debt, interest and fees, and similar topics have been covered extensively by me, as well as other contributors to this blog. You will probably be surprised to learn then that I use my own credit card quite regularly. As you see how I use it in a responsible manner, my hope is that you will try to emulate these methods in place of worse ones.

My main philosophy towards credit cards is that they are an instrument of convenience rather than an instrument of debt. That means that I never use my credit card to purchase something that I don’t have the money to cover. I basically use my card instead of writing a check for my purchases. I also try to pay all of my bills with my credit card in a similar manner.

Advantages

• I have never had to pay interest or fees because I pay my credit card bill on time and in full. If I couldn’t pay my bill in full, then I must have made purchases beyond my means, which is against my self-imposed rules.
• I only have to write one check a month. Since my credit card is issued by my bank, I actually don’t have to write a check at all, but rather perform an online transfer from my checking account to my credit card account.
• All of my transactions can be downloaded into my financial tracking software from a single location. This helps me to easily compare my budget versus actual expenses on a regular basis.
• The main advantage of this system, for me personally, is that my credit card gives me rewards points for every dollar I spend. By making purchases on my card I get something (points) for nothing (since I would have made those purchases anyway).

The main reason that I am able to use my card in this way is that I am not heavily in debt. If I were burdened with excessive debt, then my first step would be to get out from under that debt. Luckily for our readers, strategies for debt reduction are often provided here on the Lending Club blog.

My method of credit card use is fine for normal monthly expenses, but begs the question of how to handle larger purchases, particularly if they are unexpected. First, you should remember that by not having to pay for interest and fees on a regular basis, my saving are able to grow more quickly. That means that I’m more able to afford larger purchases when the need arises. Second, if financing is required, I know that a P2P loan from Lending Club is a significantly better way to borrow. With much lower interest rates than my credit card would charge, any debt taken on would be much more manageable.

A few days ago, I was talking to my brothers and sisters, when one of them mentioned a trip to Disneyland that my family had taken when I was only a couple years old. They all started cracking up---something very funny had happened. You know that feeling you get when everyone is laughing at an inside joke and you have no idea what’s going on? Man, I wanted to know what was so funny!

As soon as they told me, I couldn’t stop laughing either---my dad (a notorious penny-pincher) had apparently asked the Disney ticket agent what discounts they offered. Then he started pulling out his discount tricks: AARP, student IDs, child prices. Then he pulled out the kicker---a check with his old L.A. address on it. He had moved away from L.A. 10 YEARS EARLIER, but he kept it in his wallet JUST IN CASE HE WENT TO DISNEYLAND.

My dad is ridiculous sometimes, but he taught me something very important---a lot of places offer steep discounts, and all you have to do is ask for them. Just yesterday, I went to a movie and asked for a student discount. I didn’t even have my student ID with me, but they had no problem giving me the discount.

I just saw an interesting post by Tim Ferriss (author of the amazing book The Four Hour Workweek) where he describes how he saved hundreds of dollars on a rental car just by asking for a discount.

I can think of several times where I overdrew money from my bank account. My bank charged me 20 bucks each time, but just by asking, they waived the fee. Be nice, cheery and polite, and you’ll be surprised how many discounts you can get.

What’s the worst that can happen? They say no. The best that can happen is that you’ll save a lot of money. You’ll never find a better ROI than that.

Not too long ago, it was a weekly ritual to wait in line at the bank for 40 minutes on a Friday afternoon to cash my paycheck. Nowadays, I tend to limit my trips to the bank to making deposits at the ATM in the lobby. For one reason or another, I made a mistake recently that I hope to learn from and avoid repeating: I walked through the lobby and into my bank’s branch office.

While the line at the bank was limited to just one customer ahead of me, even that seemed like a major inconvenience. After all, I could have received immediate attention at the bank’s website. My regret over entering the bank grew with every passing moment. My dissatisfaction continued when my turn finally arrived.

We have become a society where mundane information, once at the forefront of our minds, is now relegated to our electronic alter-egos. How many people know their friends’ telephone numbers anymore? Why would you clutter your mind with such a tidbit of information, when your phone is more than happy to remember it for you?

My bank account number, in a similar vein, resides on documents stored in a secure location – on my computer, but no longer in my mind. As such, I was forced to wait some more while account number was retrieved. After swiping my ATM card, punching in my pin number, and showing my license, the bank teller was finally able to locate my account and was satisfied that I was their customer.

Speaking my name and discussing my account, with other customers within earshot, seemed strange to me. I have grown accustomed to security through online banking and such public actions seemed counterintuitive. Although I’m sure the bank hires trustworthy employees as well, I still felt uneasy providing my license and discussing my account with a stranger.

I’m not suggesting that an ATM or online banking is necessarily safer, but I know of the safeguards in place in those cases. The human factor, while socially beneficial but potentially fickle as well, has been removed. ATMs and websites never become disgruntled, but employees often do.

I was able to take care of all of my business at the bank, but it took considerably longer than if I had done it online or at the ATM. As a result of my latest experience, I now intend to avoid the bank completely, unless I have a truly compelling reason to enter – such as needing to use their restroom.

Good or bad, in America we love easy credit. And nothing is easier than swiping that handy piece of plastic for everything under the sun.

The latest consumer borrowing numbers for May came in well over industry expectations, due largely to a sharp increase in consumer credit card use.

What’s going on?

For the past few years, the home has been the giant credit card for many Americans. With home equity tapped out, consumers seem to be turning to the next easiest alternative, credit cards.

We all saw this coming. The housing bubble had to crash sometime. It’s had an affect on the overall economy, though economists are predicting higher GDP numbers for the second quarter due to strong employment numbers and stable consumer spending (got to put those credit cards to good use, right?).

Never ending cycle

The problem is that if we don’t address our addiction to credit cards (now that the housing addiction is fading in many markets) at some point, we really will be truly tapped out.

Getting out of debt isn’t easy, trust me, I know. I’m trying to do it myself. But there are better alternatives to swiping that credit card for every purchase you need to make. And speaking of purchases, have you looked at where your money is going lately? I was shocked to learn my spending habits varied greatly from what I thought, once I took the time to sit down and go through my bank statements. As I mentioned in a previous post, you’ll be surprised to see where your money is really going if you just take time to analyze your spending.

Are you stuck in the credit purchase jungle? Maybe it’s time to consolidate your high-interest credit cards with a P2P loan on Lending Club, so that someday you can be a lender and not just a borrower!