Rules of thumb are guidelines that help us make quick and easy decisions. They are methods or procedures based on experience, but aren’t meant to be scientifically accurate.
When it comes to finances, rules of thumb revolve around how much you should spend on a house (2.5 times your annual income), how much debt is too much (no more than 35 percent of take home), how much you need to have in a savings account (three to six months of expenses) and how much to save (10 percent of your income). All these are useful rules, but the question is, if people follow the rules, does it make a difference in our financial health?
Recently research done by the Urban Institute was aimed at helping consumers control their credit card use by employing rules of thumb related to finances. Rules of thumb have shown promise in helping people make decisions that are repetitive and frequent, which is exactly what using a credit card is.
Credit card debt is a problem for many of us. One in three U.S. households carried a month-to- month credit balance with an average debt of $5,247 per borrower in 2016, according to a survey by the credit reporting company, TransUnion. However, there is little information telling us any kind of useful guidelines or rules of thumb in using credit cards.
Rules of thumb are simple, easily done actions that simplify complex and time-consuming decisions. The research focused on two rules of thumb: don’t swipe the small stuff and credit keeps charging.
The Urban Institute worked with an Arizona federal credit union to deliver those two messages through email, web banners when credit card users logged in and calendar magnets.
Don’t swipe the small stuff was the theme chosen to remind consumers to not use their credit cards if the total is under $20. Participants who were exposed to this rule of thumb had lower credit card balances for the six months of the study. Those who received the message had balances of 2 percent less than those who didn’t receive the message.
Credit keeps charging focused on the fact that continued credit use can add 20 percent to the total bill. When consumers received this message, they carried balances of $102 less than those who were not exposed to the message.
These rules of thumb did make a difference in the consumers’ financial well-being. Since this is America Saves Week, I’d like to challenge you to follow these two simple rules of thumb. If the bill is less than $20, don’t charge it. Either pay it outright, or skip the expenditure completely. The second rule of thumb that credit keeps charging, is a simple reminder of the basis of the credit industry. You are paying for the privilege of using money that you don’t have.
Consider these rules related to the regularity in which you are inundated with marketing messages to buy. In fact, for every $1 spent on financial education, over $25 is spent to get you to buy something, according to the Consumer Financial Protection Bureau. The odds are stacked against us. Try using these two financial rules of thumb to conduct your own study of whether it will help you reduce your credit card debt.