Surprise, Surprise: Americans Have No Idea How Much They Owe on Credit Cards

Source: Flickr user Sean MacEntee.

Americans often struggle to talk about money and when they do, they often downplay how much they owe on their credit cards. That finding by researchers at the New York Federal Reserve Bank calls into question debt surveys commonly relied upon to determine how Americans are doing financially, but it also speaks to why so many of us fall short in tackling our debt and preparing ourselves for a financially secure retirement.

A big gapFor decades, the Federal Reserve Bank of New York has conducted its Survey of Consumer Finances, or SCF. Arguably the broadest survey of its kind, the SCF is something public and private economists rely on heavily to evaluate the average American's balance sheet. However, because the SCF is a survey, its accuracy relies on Americans' having a clear picture of their debt situation and reporting their debt honestly.

Unfortunately, survey respondents' track record, at least in regard to credit card debt, is poor. After comparing SCF debt survey responses from 2001, 2004, 2007, and 2010 with the actual debt levels lenders report to Equifax, one of the three major credit reporting bureaus, researchers discovered that Americans do a good job reporting their housing and auto loan debt, but that they significantly underreport their credit card debt.

On average, Americans told surveyors they had 40% less credit card debt than they really did. Some of that gap can be explained by people's failure to report business credit card balances that still show up on their credit report, and by the fact that some respondents might not have any credit at all, but even after accounting for those explanations, researchers still determined that people underreported their credit card debt by 37%.

What's going on and why it mattersAfter parsing the data, it was discovered that those Americans who most significantly underreport their credit card debt live in bigger households. That indicates that individuals in a household may have a good handle on how much they owe on their credit cards, but that they're far less certain how much money other members of their household owe, such as their spouse or significant other.

Not knowing how much money these other members of the household owe could explain why the SCF results differ so widely from the credit bureau figures, but more importantly, it points to a big reason so many families are financially ill-prepared for their future. It's incredibly difficult, if not impossible, to craft an effective financial plan that reduces debt and maximizes retirement income without having a complete understanding of a family's financial obligations; especially when it comes to credit card debt.

Because lenders charge an average 15.72% annually in interest on variable-interest-rate credit cards, according to Bankrate, credit card debt is often the most costly type of debt Americans owe. Since credit card interest rates are so high and the average person owes thousands of dollars in credit card debt, credit card payments end up taking a lot of money away from Americans -- money that could otherwise be saved or invested for the long haul.

What to do and why to do itIf you're not sure how much your household owes in credit card debt, it's time to sit down with the other members of your family and have an open and honest discussion. Once you know exactly how much you owe, create a plan that reduces your credit card balances as quickly as possible and then sock away any savings from doing it. Why? Because investing the savings created by paying down credit cards can add tens of thousands of dollars to your retirement account.

Cutting credit card bills by even $100 per month and then putting that amount of money to work in an investment earning a hypothetical 6% annually could increase a person's retirement savings by nearly $95,000 over 30 years. Not only will having that money in your wallet, rather than in your lender's wallet, go a long way toward helping you achieve financial security, but it will also allow you to more accurately answer the feds' survey, should they come calling.

The article Surprise, Surprise: Americans Have No Idea How Much They Owe on Credit Cards originally appeared on

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright 1995 - 2015 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.