Leave Home Without It? The Effects of Credit Card Debt and Available Credit on Spending
Credit card debt in the United States rose by $17.1 billion in May 2012, suggesting that many Americans are still struggling to make ends meet as the economy’s “jobless recovery” continues. A 2011 study, “Leave Home Without It? The Effects of Credit Card Debt and Available Credit on Spending” (PDF), noted that many of those who defaulted on their credit card debts during the recession had solid credit histories. How do these responsible consumers unaccustomed to significant debt deal with rising credit card balances and declining credit lines?
That study, published in the Journal of Marketing Research, analyzed the results of four experiments and an online survey to better understand the effects of both credit card debt and available credit balance on the spending practices of consumers with relatively high self-control. Traditional economic theory suggests that an individual’s level of self-control is maintained regardless of circumstances, but behavioral studies have shown that people tend to abandon a goal after an initial failure — for instance, a smoker trying to quit, smokes one cigarette and then abandons his goal altogether.
Key study findings include:
- “For people with high self-control, carrying a credit card balance leads to greater spending than no balance.” The researchers suggest that this finding complements existing behavioral research on early frustrations that derail goal attainment.
- The amount of available credit has no impact on spending habits. “Available credit moderates the effects of an incurred balance on spending, so that increases in the available credit reduce the psychological impact of the balance and eliminate greater spending for people with high self-control.”
- The amount of available credit does influence the emotional responses of those with higher levels of self-control. When the available credit was less than $1,000, these individuals experienced more negative emotions, but when available credit was more than $10,000 there was no emotional impact. “Increasing available credit reduces the psychological pain associated with incurring the balance or those with high self control.”
- “The relationship between self-control and the likelihood of incurring a balance is relatively small … implying that people with high self-control may not be effective at avoiding unwanted behaviors in the financial budgeting domain.”
The researchers concluded that “the same mechanism that leads those with high self-control to be more effective at controlling their spending before incurring a balance (i.e., debt avoidance) also makes them prone to suspend control after incurring a balance.” They suggest that this tendency to relax fiscal constraints in the face of a setback can be addressed by focusing more closely on the goal-setting process, mitigating feelings of failure, and better understanding consumers’ perceptions of wealth.
Tags: consumer affairs, economy
Read the study-related Oregonian article titled "Think You're Good at Controlling Spending? Beware the 'What the Hell Effect' with Credit Cards."
- What key insights from the news article and the study in this lesson should reporters be aware of as they cover issues related to credit card debt?
Read the full study titled “Leave Home Without It? The Effects of Credit Card Debt and Available Credit on Spending” (PDF).
- What are the study's key technical term(s)? Which ones need to be put into language a lay audience can understand?
- Do the study’s authors put the research into context and show how they are advancing the state of knowledge about the subject? If so, what did the previous research indicate?
- What is the study’s research method? If there are statistical results, how did the scholars arrive at them?
- Evaluate the study's limitations. (For example, are there weaknesses in the study's data or research design?)
- How could the findings be misreported or misinterpreted by a reporter? In other words, what are the difficulties in conveying the data accurately? Give an example of a faulty headline or story lead.
Newswriting and digital reporting assignments
- Write a lead, headline or nut graph based on the study.
- Spend 60 minutes exploring the issue by accessing sources of information other than the study. Write a lead (or headline or nut graph) based on the study but informed by the new information. Does the new information significantly change what one would write based on the study alone?
- Compose two Twitter messages of 140 characters or fewer accurately conveying the study’s findings to a general audience. Make sure to use appropriate hashtags.
- Choose several key quotations from the study and show how they would be set up and used in a brief blog post.
- Map out the structure for a 60-second video segment about the study. What combination of study findings and visual aids could be used?
- Find pictures and graphics that might run with a story about the study. If appropriate, also find two related videos to embed in an online posting. Be sure to evaluate the credibility and appropriateness of any materials you would aggregate and repurpose.
Class discussion questions
- What is the study’s most important finding?
- Would members of the public intuitively understand the study’s findings? If not, what would be the most effective way to relate them?
- What kinds of knowledgeable sources you would interview to report the study in context?
- How could the study be “localized” and shown to have community implications?
- How might the study be explained through the stories of representative individuals? What kinds of people might a reporter feature to make such a story about the study come alive?
- What sorts of stories might be generated out of secondary information or ideas discussed in the study?