Why Do So Many Young People Struggle With Credit Cards?

A lot of people believe that credit card debt is caused by being inherently bad with money. Individuals that spend a lot of money but do not save end up in debt and have to pay high interest rates on their cards. However, Professor Theresa Kuchler’s paper entitled “Sticking to Your Plan: The Role of Present Bias for Credit Card Paydown” demonstrates that is not the case for credit card debt. While many people do want to pay off their credit card balances, they fail to follow through on their plans to pay it off due to a natural human tendency.

In Professor Theresa Kuchler’s paper the concept of present bias is thoroughly discussed. Present bias is the idea that people make too many decisions based on what would make them feel good at the present time rather than making a decision that would ultimately benefit them in the future. People may state that they will pay off their credit card balances and then they never do, just to put it off for their next paycheck where the cycle repeats.

The research that was conducted by the authors of this paper collected information from individuals who used an online financial service to develop their own plan for paying off their credit card balances. The study looked at how much of the plan was followed up by these individuals. The result of this study was shocking; people only paid back an average of 25 to 30 cents of every dollar that they had planned to pay back.

That really stood out to me because it shows the problem is not always knowledge. A lot of people do know what the right decision is. They even make a plan. But making a plan and sticking to it are two very different things.

There are two types of individuals that behave differently when it comes to financial planning for paying off credit card balances. Sophisticated individuals are aware of their tendency to make bad financial decisions. Naive individuals believe that their future self will be capable of making better financial decisions than they themselves are capable of making now. That is a huge reason why people fall behind. They keep assuming that later version of themselves will suddenly become better with money

Many young individuals may not be “financially irresponsible,” as some may expect of those without financial knowledge. Instead, many of these young people may simply be more inclined to spend their money on credit cards rather than feeling the loss of money when they spend it. They are also unaware of their credit card balances and how high the interest rates could be for these balances.

Furthermore, a lack of financial literacy is not the only explanation for the bad financial behaviors of young individuals. The authors of the study explain other explanations for the financial unknowledgeability of these young people. Even if someone understands credit cards, interest, and debt, they can still make bad choices because human behavior gets in the way.

In order to assist young individuals with making better financial decisions, it is essential to understand their behavior with money rather than just teaching them financial knowledge. Tools that can assist individuals in following their repayment plan for their credit card could make a difference in their behavior towards their credit cards, like automatically putting part of each paycheck toward debt repayment. 

Many people are not bad with money because they are lazy or clueless about money management. Some people simply have bad behaviors with money because they are human. And if that is true, then better financial education should not just teach information. It should also help people deal with the behavioral side of money.