Americans will start off another new year with hopes of changing their bad financial habits. Lose weight. Run a marathon. (Okay, a half-marathon.) And — oh, yeah — sock away a little more in the 401(k) plan. Improving one’s financial habits may not top everybody’s list of New Year’s resolutions, but recent studies suggest that some tactics people use to follow through on their intentions — especially relying on different types of peer pressure — can also help them with their money habits. The only problem: They can also backfire.
Remember when you were a kid and your parents harped on the importance of “delayed gratification” to get ahead in life? (You know: Put that birthday money in the piggy bank and save for something nice, instead of blowing it all now on Milky Way bars.)
We take a fresh look at the concerns about credit card pricing and empirically investigate whether the Credit CARD Act of 2009 has been successful in addressing those concerns. The rational choice theory of credit card pricing, which posits that issuers use back-end fees to adjust the price of credit to reflect new information about borrowers’ credit risk, predicts that issuers will respond to the Act by using alternative ways to price risk. In contrast, the behavioral economics theory, which posits that issuers use back-end fees because they are not salient to consumers, predicts that issuers will respond by increasing unregulated non-salient prices.
After years of tight lending, some banks have been loosening their purse strings and making it easier for consumers to qualify for personal loans. SunTrust Bank, which operates mostly in the south and Mid-Atlantic, has issued 23% more personal loans this year through September compared to the same period last year, while TD Bank reports a 5% jump. Capital One and Wells Fargo say they’re also issuing more personal loans. “The product seems to have been reborn,” says John Ulzheimer, president of consumer education at SmartCredit.com, a credit-monitoring site.
We studied the perception of wealth as a function of varying levels of assets and debt. We found that with total wealth held constant, people with positive net worth feel and are seen as wealthier when they have lower debt (despite having fewer assets). In contrast, people with equal but negative net worth feel and are considered wealthier when they have greater assets (despite having larger debt). This pattern persists in the perception of both the self and others. We explore consequences for the willingness to borrow and lend and briefly discuss the policy implications of these findings.
James Surowiecki has a column this week on strategic default that implies that we should end the double standard on strategic default which lets corporations walk away from unprofitable real estate, while borrowers get off scott free. I think there are a number of weaknesses in the argument, starting with the example he leads with: the American Airlines bankruptcy. It’s true that American chose the timing of of their bankruptcy, but as I understand it, they were deciding when to walk away, not whether.
This contribution takes a close look at overdraft facilities, the most eccentric type of credit under the scope of Directive 2008/48 EC on credit agreements for consumers. Even in the absence of a ‘smoking gun’ linking consumer credit to personal insolvency, the tacit nature of this type of credit represents a significant “spiral of debts” risk. Armed with some overdraft facility basics we provide several theoretical insights on imperfect markets for consumer finance and consumer (un)awareness and biases when contracting for money.
This research develops a theoretical account of cultural meanings as integral mechanisms in the normalization of credit/debt. Analysis derives these meanings from the credit/debt discourses and practices of 27 white middle-class consumers in the United States and tracks their negotiation in patterns and trajectories in social and market domains.
This paper investigates whether self-employed households use consumer loans – in particular installment loans and overdrafts – to finance business activities. Controlling for financial and non-financial household variables we show that self-employed households particularly use personal overdrafts significantly more often than employee households. When analyzing the correlation between consumer loan takeups and consumption of self-employed in comparison to employee households, we find first evidence that overdrafts are used by self-employed to finance their business as well.
Purchases fall along a continuum from ordinary (common or frequent) to exceptional (unusual or infrequent), with many of the largest expenses (e.g., electronics, celebrations) being the most exceptional. Across seven studies, we show that, while people are fairly adept at budgeting and predicting how much they will spend on ordinary items, they both underestimate their spending on exceptional purchases overall and overspend on each individual purchase.