Americans fall short in debt reduction

January 14, 2005

Survey finds many consumers' financial situations will grow worse this year


Inman News

Many Americans dream of a debt-free future but few are doing anything to plan for that scenario, according to a new survey released this week by LendingTree.com.

Moreover, the vast majority of people who are most concerned about their debt have no intention or definitive strategy to manage it, but instead are planning to make big-ticket purchases that will make their financial situation worse.

Occurring at a time of year when people traditionally take stock of their finances, The LendingTree.com Smart Borrower Survey finds that many Americans long to become smarter borrowers but have quite a ways to go. LendingTree.com hopes the survey, which polled 1,000 consumers, will highlight the importance of approaching debt wisely through smarter borrowing techniques and decisions as we enter 2005.

"When it comes to breaking the cycle of debt, most Americans have good intentions. What they lack are the tools, support and knowledge to manage their debt wisely. They dream of a debt-free future, but need to learn how to become smart borrowers to make that dream a reality," said Ed Powell, chief consumer officer at LendingTree.com. "The good news is that it's never too late to become a smart borrower, and there are sensible measures and methods that can help people get off the treadmill of habitual debt. The New Year is the prefect time to rekindle that resolve and become fiscally fit."

The Debtors' Dream: The vast majority of respondents, almost 80 percent, believe that their future holds a life completely free from debt. Few, however, plan to incorporate a stricter regimen of smart borrowing practices and decision making to convert this dream into a reality. The survey illustrates an overall disparity between best intentions and actual deed. Ruled by inertia, apathy or worse, denial, consumers indicate in their responses that they are either not doing enough to improve their debt standing or are making matters worse with unnecessary purchases that will ultimately aggravate the situation.

The survey finds that of those making any kind of New Year's resolution, most center on health matters. Those who make a financial resolution do so with somewhat feeble conviction:

  • A full 80 percent of the respondents who make financial resolutions do not plan to seek professional help to manage their debt and/or finances;

  • 13 percent have no intention of developing a financial plan of any kind;

  • 30 percent indicate they will develop a plan on their own without any professional assistance;

  • 30 percent of those who lack a financial plan are more concerned with the amount of their monthly payments than the overall terms of a loan. Few understand that the smarter borrowing option is to consider the overall terms and not just the monthly payment.

The survey also finds that a significant number of respondents, 60 percent, are moderately to extremely concerned about their overall level of debt. However:

  • Of this number of concerned consumers, 63 percent do not have a financial plan;

  • In addition, only 1 in 10 of those who are concerned with their debt plans to seek out a professional financial planner to assist with debt management.

A portion of those who are moderately to extremely concerned with their overall debt indicate plans to make their situation worse by making unnecessary purchases, prolonging the vicious cycle of debt:

  • 19 percent of those concerned with their debt have plans to purchase a car in 2005;

  • 21 percent of those concerned with their overall debt have plans to make home improvements over $3,000, but more than one third of these people don't know how they will pay for the home improvements they are planning;

  • 33 percent of those most concerned with their debt have a debt-to-income ratio of 50 percent or more, which is 10 percent higher than the national average. Worse, almost 1 in 4 consumers surveyed has a debt-to-income ratio of 50 percent or more. The ideal debt to income ratio, according to most financial planners and lending institutions, is 33 percent.

Of the 76 percent of those with outstanding balances on credit cards/personal loans who are concerned about their overall level of debt, 37 percent are only making minimum payments and playing "credit card bingo" by rolling over balances to lower-interest cards.

Twenty-six percent of those who claim to be knowledgeable about loans and finances are approaching credit card debt in the same manner.

  • The typical U.S. household carries $9,200 in credit card debt, according to CardWeb.com, shelling out $1,100 each year in interest and fees;

  • According to the Deborah McNaughton, president of The Professional Credit Counselors, Americans between the ages of 35 and 44 have the highest rate of bankruptcy followed by those 25 to 34. Bankruptcy stays on a credit report for 10 years;

  • According to the U.S. Federal Reserve, debt levels of U.S. households increased at a 9.1 percent annual rate in the third quarter 2004 to $9.95 trillion;

  • Also according to the Federal Reserve, total U.S. debt increased at a 7.4 percent annual rate to $23.6 trillion.

LendingTree.com, via Insight Express, conduced the survey during December 2004. The survey had an overall margin of error of +/- 3 percent. The survey criteria is based on an age population of 21-plus with sampling balancing for household demographics.

Copyright 2005 Inman News


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