When Managing Debt, It’s the Thought That Counts


NEW YORK (MainStreet) -- In debt management, as with gift-giving, apparently it’s the thought that counts.

A new study from the University of Nebraska-Lincoln shows that what you think you know about finance is every bit as important as what you actually know when managing a credit card account. In fact, the more you think you know about money management, the more likely you're a good card manager and have a better credit rating.

Economists Sam Allgood and William Walstad, who led the study, reached that conclusion by studying credit card payment patterns in two ways: how much study participants actually knew about financial issues, and how much study participants thought they knew about financial issues.

“Before beginning, we hypothesized two possibilities: people would be over-confident and this would lead them to make bad decisions or that people need confidence to act on the knowledge they possess,” Allgood explained in a statement. “Our study suggests that it is the latter. You must have actual knowledge to make good personal financial decisions, but people are not willing to act on that knowledge unless they also perceive themselves to be knowledgeable.”

The study of 27,500 cardholders in the U.S. tracked five credit-card behaviors: paying credit card bills in full, carrying a credit card balance month-to-month, paying just the minimum payment, paying late fees and exceeding a card’s credit limit.

The survey notes that “in all cases,” survey participants who “perceived” their financial acumen as high exhibited more responsible credit card behavior than those who believed their financial savvy was “low,” even when their actual credit knowledge was the same.

Specifically, the Nebraska study said that those cardholders who “perceived” they were smart about money were 15.5% more likely to pay their credit card bills in full compared to consumers who had the same level of money savvy, but who perceived themselves as “not having a high financial expertise.”

In addition, the “low perceivers” were:

  • 15% more likely to carry over a monthly balance
  • 12% more likely to pay only the minimum monthly payment
  • 11% more likely to be charged a late fee
  • 6% more likely to spend more than their credit card limits allowed

That seems to stand conventional wisdom on its head, since one would assume that knowledge of the ins and outs of debt management should trump whatever opinion you have of your own financial intelligence. Instead, people who think they know more about money than they actually do have a better handle on their credit cards than those more realistic types who think they don’t know as much as they really do know about money.

So even if you can’t grasp that specific financial skill set, just fake it – your budget and your credit rating may thank you for it.

For a comprehensive look at managing debt and getting the most out of your credit profile, check out MainStreet’s ongoing Credit Q&A series!

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