The New American Frugality is Nothing But a Myth

posted on 06-07-2019

Guest blogger Odysseas Papadimitriou is the founder and CEO of Card Hub, a website that helps consumers find the best credit cards for their needs, and Wallet Hub, the first personal finance social network.

It's common sense, the notion that consumers would alter their spending habits following the worst financial crisis since the Great Depression. After all, the Great Recession would never have happened if we hadn't gotten ourselves into loans that our incomes could not sustain.  

U.S. consumers simply aren't becoming more frugal, though, despite what reports glomming onto this convenient storyline might indicate. In fact, the rate at which we're incurring debt is actually increasing, and we're headed down a very dangerous path as a result.

Wait a minute.  

Don't debt statistics paint a different picture?  

Didn't we actually pay off $44.6 billion in credit card debt during the first quarter of 2012 alone?  

The answer to this type of question is "Kind of." It's easy to get the wrong idea when looking at the government's statistics on consumer revolving debt -- the vast majority of which is credit card debt. That's especially true with  first quarter data. 

First of all, this is when most people receive their annual salary bonuses and tax refunds as well as strive to pay down amounts owed from the holiday shopping season. That explains why consumers have paid down a significant amount of debt during the first quarter of each of the last three years before erasing this decrease over the next three quarters and ending the year with a greater debt burden than they started with.  

When most people look at credit card debt statistics, they also forget to consider the amounts that banks have written off the books for accounting purposes. This debt may no longer appear in the government's consumer debt data, but it does not merely disappear or cease to be owed by the debtor. Actually, indebted consumers are at risk of being sued for 3-15 years after they become delinquent, depending on their state.  

The True State of American Credit Card Debt

With all of that in mind, a new picture of consumer spending in the U.S. begins to take shape, and it's a decidedly more ominous one. According to the latest "Credit Card Debt Study" from Card Hub, U.S. consumers actually paid down $35.8 billion during the first quarter of 2012 and are on pace to have $50 billion more in credit card debt at the end of 2012 than they had at the beginning. 

Consumer credit management is also consistently worsening. In the last nine fiscal quarters -- with the exception of Q1 2012 and Q3 2010 -- we've seen two distinct trends, and neither are good.

  • Our first quarter pay downs are increasingly smaller and the amount of debt we add in each subsequent quarter is greater than the amount incurred during the same quarter the year before.
  • Every quarter, credit card debt metrics are looking worse than the same quarter the year before.

Now, does this look like the same type of economic landscape portrayed by reports hailing newfound frugality? Take, for example, a 2010 Booz & Co. study titled "The New Consumer Frugality:  Adapting to the Enduring Shift in U.S. Consumer Spending and Behavior."

"A new frugality, characterized by a strong value consciousness that dictates trade-offs in price, brand, and convenience, has become the dominant mindset among consumers in the United States -- and probably in other wealthy countries as well. Two-thirds of American shoppers are cutting coupons more frequently, buying low price over convenience, and emphasizing saving over spending. Per capita consumption expenditure has declined across demographic groups. Consumer sentiment remains weak. These trends are not going to change, no matter the pace of economic change," the study reads. "In short, the Great Recession has forced consumers to shift their behaviors, and many of these new behaviors will stay in place."

Consumers are obstinately struggling to hang onto pre-recession spending. They have yet to face the new economic reality.

In truth, consumers are obstinately struggling to hang onto pre-recession spending. They have yet to face the new economic reality: Pre-recession spending levels are a thing of the past for anyone whose income is at all tied to the housing industry, unless of course, another bubble forms.  Realizing that is the first step to curing our obsession with debt.

Ways to Tame Out-of-Control Spending

There are a number of other ways for consumers to make sure they are spending within their means. Budgeting is obviously extremely important, and this too requires a change in perspective. Things that were once considered luxuries -- think private transportation, fancy smartphones and extravagant television packages -- have gradually come to be known as necessities. It's therefore essential that anyone who spends more than they can afford to pay back each month rethinks their priorities. 

The easiest way to do so is to look at your spending in previous months and rank your expenses in order of importance, with things such as food, housing and insurance topping the list. Then, eliminate any expense that will cause you to exceed your monthly budget. You can even ask your credit card company to lower your limit to this amount or set up automated monthly payments from your checking account.

Other helpful means of curbing overspending include:

  • Transferring a Balance: Transferring a balance to the right 0% balance transfer credit card will give you more than a year to pay down your debt without incurring additional finance charges. As such, it offers a way to expedite debt freedom and potentially save thousands of dollars. By using a credit card calculator, you'll be able to compare all of the cards on the market in order to determine which will save you the most money.
  • Using the "Island Approach": This is a credit card strategy that suggests using different credit cards for different needs and/or types of transactions. If, for example, you use one credit card to revolve debt and another to make everyday expenses, you'll know immediately if you're spending beyond your means. How?  Well, you should always be able to pay your complete balance on your everyday spending card, so the presence of finance charges will clearly indicate a need to cut back. In addition, this approach allows you to get the best rewards for everyday expenses and the lowest interest rates for debt.

Ultimately, you should take the current state of consumer debt not as a cause for panic, but as an opportunity for improvement. There is still time to reverse course and avoid truly serious economic complications, we just have to put our collective noses to the grindstone!

Related stories from 10 States With the Highest Credit Card Debt per Person; The Ugly Truth About Credit Card Debt