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Consumer Reports Poll: Consumers Learned Big Recession Lessons

Americans scale back spending, shun credit cards, beef up savings

September 29, 2009

A year after the onset of the current recession, Americans are adapting to a new reality. CR’s nationally representative poll also asked respondents what they would splurge on when the recession was over. The most often mentioned indulgence was a vacation (17%), followed by nothing (15%.) CR also posed the question: If you were to win $10,000 tax-free and could use it for only one purpose, what would you do? Two-thirds of consumers, 66%, would use it to address debt or savings/investment.

“Now that the economy is showing signs of recovery, we may soon see if consumers retain the lessons learned through this difficult period and follow through on those good intention,” said Noreen Perrotta, Consumer Reports Money editor.

The behaviors learned may be ushering in a new fiscal conservatism once the recession passes and life is back to normal. According to poll results, intelligent thrift is likely to replace credit-driven spending. Seventy-nine percent said they would continue to purchase only what they absolutely needed post-recovery, 61% said they would continue to dine out less often, 61% said they would continue to take less expensive vacations, and 55% said they will continue to spend less on groceries.

How to pay down your debt

Americans currently owe $917 billion on revolving credit lines and almost all of it is a result of charging purchases to credit cards. As Americans are putting less on credit cards, Consumer Reports Money Adviser evaluated different strategies for retiring credit card balances in the October issue:

• Pay off the card with the highest interest rate first. Mathematically, this option will result in the lowest amount of interest paid. Chances are, if you carry a monthly balance on one of your accounts, you probably do on a number of credit cards. The good news is that it doesn’t take much of a bump in monthly payments to retire the balance a lot faster.

• Pay off the card with the lowest balance first. This is known as the “snowball approach” to paying off debt. You budget a total monthly amount to allocate among all your credit cards. Pay the minimum balance on the cards with the larger balances. And put the bulk of what you’re able to pay towards the card with the smallest balance. When the smallest balance is paid in full, then drive all of the payments into the card with the next lowest balance. Although you’ll pay a little more in interest (unless the smallest balance is also the one with the highest APR), having open accounts with zero balances may in turn give you more leverage with your creditors.

• Pay the highest balance off first. Issuers are taking the axe to credit lines. Borrowers with large balances—especially balances that equal more than 50 percent of the line of credit—are especially vulnerable to having their credit limits reduced. For that reason, you should strive to keep your balances below 30 percent of your credit line and pay down balances to that level as quickly as you can.

• Which approach is best for you? As long as you stick to it, any of the approaches CRMA has highlighted have merit. You can even change tactics midstream—for instance, pay down a high-balance credit card first, then, when that balance is below 30 percent of the credit line, switch to paying the card with the highest APR. The greatest challenge will be resisting the temptation to backslide toward making only minimum payments.

For more information on debt, credit cards, saving and investing visit www.ConsumerReports.org.

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