Credit Cards, Bankruptcy and Happiness; an Academic Study
People are wired differently. That is, the human brain’s “wires” are activated, or stimulated differently. In a study regarding credit cards and debt management undertaken by University of Michigan Ross School of Business Professor Scott Rick and others, the “insula” part of the brain had vastly different reactions to the same consumer stimuli. In controlled testing, about 30% experienced a “fired up” stimulation to the presentation of consumer products, while 50% had a “measured response” and 20% had a pleasure response. The “fired up insula” is analogous to a negative reaction to a smell, or injustice.
The study, entitled Winning the Battle but Losing the War: The Psychology of Debt Management, is expected to be published in the Journal of Marketing Research. Dr. Rick used the study to determine if someone was more likely to be a spendthrift or a tightwad. The spendthrifts overspend because they don’t feel enough pain for their own good. The tightwads experience a vast amount of pain when spending or refraining from spending. Either extreme is, well, extreme and needs to be in better control. The goal, he says, is to be in the middle, or “unconflicted.” Using credit cards eases the tightwads somewhat, however, the same use of credit cards has no different effect from cash for spendthrifts.
The professor points out the differences between someone who is a tightwad and someone who is frugal. A tightwad finds it difficult to spend, while a frugal person enjoys saving!
Dr. Scott Rick’s paper regarding Debt Management explains the manifistations when it comes to credit cards. The professors’ research concludes that notwithstanding the clear benefit of paying off the highest interest credit card first, consumers will regularly pay off the credit card with the lowest balance first. This is because consumers “break complicated tasks into more manageable parts, and because losses are most distressing when segregated” resulting in a failure to reduce total debt as efficiently or as effectively if their actions were more rational from a purely economic perspective.
The report points out that the average credit card user has $1,000 on each of five credit cards. Many have car loans, home loans, and school loans as well. The myriad types of debt can be confusing for consumers. There is some debt, such as mortgages, wherein the payoff generally results in significant equity.
Their advice? Tightwads should set up multiple bank accounts dedicated to various activities: the holiday account, once built up, can be fully spent on holiday gifts, for example. Mortgage debt, regardless of interest rate, as mentioned above, should be treated somewhat differently. Spendthrifts need to avoid credit cards, which they see as cash in their hands. They need to set short term budgets.
Our Massachusetts bankruptcy clients take two required classes, entitled Credit Counseling and Debtor Education, which help “teach” that credit can be expensive because of the interest rates. Most folks know this, but some have no idea.
Further, the professors advised that financial institutions should display the “total amount of interest accumulated” which would “focus consumers on repaying high-interest debts.” While the study does not mention the new Consumer Financial Protection Bureau that we have highlighted in our Massachusetts bankruptcy blog articles.