Do Americans Know How Much They Owe?

When it comes to credit cards and student loans, some people seriously underestimate their debt.

Jessica Rinaldi / Reuters

With all the focus on the havoc that debt can wreak, one would assume that most Americans are keeping close tabs on how much they owe. But a recent study comparing how much debt households thought they had compared with how much lenders said they actually had found that in some cases, Americans may have a skewed perception of their finances.

In order to compare people’s perspectives on debt with their debt reality, the researchers Meta Brown, Andrew Haughwout, Donghoon Lee, and Wilbert van der Klaauw of the New York Fed looked at the Survey of Consumer Finances (SCF), which gathers data on finances as reported by American families, and compared those figures with those reported in the Consumer Credit Panel (CCP)—a dataset that includes households debt from the credit-reporting agency, Equifax.

The outcome was mixed. When it comes to debt such as mortgages, home-equity lines, and car loans, the data from the two groups consistently matched up—meaning that households reported having just about as much debt as lenders said they did. But for credit cards and student loans, there was a significant gap between the two reports.

For these types of debt, Americans’ perceptions was a bit rosier than the figures provided by their debtors. According to the data, households estimated that they owed about 40 percent less than what their lenders said they owed on credit cards—about $440 billion compared to $731 billion. The researchers then tried to control for some variations, including the possibility that lenders included charges that were actually for used business expenses (nearly half of all small business owners use personal cards for expenses, the report said), while families omitted these debts. But even with a generous estimation for small business expenses, there was still a 37 percent discrepancy between household and lender reports.

A significant gap also appeared when comparing household reports of student-loan debt to creditor reports. For those accounts, families listed that their total student loans amounted to about 25 percent less than what appeared on credit reports.

The gap in accuracy grew when accounting for more adults in one households. Researchers suggest that this may mean that while individuals are well aware of their own debt situation, they aren’t very good at estimating the total debt racked up by a family member or significant other who lives in the same household. That may help explain why the gap was most pronounced for households that were headed by someone of prime age—those between 35 and 75 years old—since they are most likely to share a home, and finances, with other adults.

While households could, for some reason, intentionally misreport their debt during the survey, the gaps between what people think they owe and what lenders say they owe might hint at a bigger issue—lack of debt awareness. And that’s a problem because ignorance about debt loads can mean that families make ill-informed financial decisions about how they spend and how they repay—which could affect how they build wealth.