A new study published by the Federal Reserve Bank of New York took a sweeping, multi-year look at data about the debt Americans carry and how much we know about those debts. One strange finding: Single people are much better at estimating the amount they owe than people who share their household with a partner. “[T]his may tell us something about the nature of household members’ interactions over financial matters,” the Fed says.In general, the study found that while Americans are pretty knowledgeable about the amounts of our mortgages and car payments, we’re awful at guesstimating how much we owe in credit card debt. On top of that, the discrepancy is wider for people who live with someone else than for singles.
The Fed used two data sets for its research: An extensive set of surveys in which consumers are asked about their finances, which the report’s authors say is “generally cited as the leading source of wealth data for the United States,” and credit report data about debts drawn from credit bureau Equifax. The information was controlled for factors like age and household size.
Since surveyors ask only one person in the family about the entire family’s debts, the Fed theorizes that respondents have a better grasp on their own debts than those of other adults in the home.
While about half of respondents said they have credit card debt, the reality is that more like three-quarters do. Among singles, there is roughly a 20 percentage point discrepancy between people who say they owe and those who actually owe credit card debts. For couples, this widens to more than 30 percentage points.
When it comes to how much we owe on our credit cards, we’re similarly clueless. According to the aggregate raw data, Americans think they owe about $391 billion in credit card debt. The actual bill: $820 billion.
Overall, the Fed speculated that some of this difference could be due to people who pay off their balances every month. These consumers might not view their credit card balances as “real” debt and not include these balances in their estimate of how much they owe. The Fed also considered a couple of other factors to explain the discrepancy, and crunched the numbers to take those into account.
But it didn’t help much. Results still showed a 34 percent gap between what people say they owe on their credit cards and what they actually owe. For the average American, this means thinking they owe $4,700 when they actually owe $7,134.38.
Lowballing the amount we think we owe on credit cards has practical and potentially expensive consequences. People who revolve balances may underestimate the amount of time it will take them to pay off that debt as well as the amount they’ll pay in interest. An overly rosy picture of your household’s credit card debt may also make you overly confident about how much additional debt your family can shoulder comfortably.