If you had $5,000 in credit card debt, and a random amount of savings between $1,000 and $10,000, how much of that savings would you use to pay down that debt? That was the hypothetical question that researchers at the Consumer Financial Protection Bureau put to consumers recently, seeking to understand the extent to which preserving savings and paying down debt may be competing goals.
To answer that question, the researchers asked 551 consumers that very question, first giving them one of 10 amounts ranging between $1,000 and $10,000 in savings, and $5,000 of credit card debt. The consumers were then asked how much of their savings would they use to pay down the credit card debt. Perhaps not surprisingly, nine of the 10 groups did not use all of their savings to pay down their debt. Only one group — the cohort that was given $10,000 in savings — had the majority of individuals make a maximum debt payment, and only 77% of that group chose to do so.
Even more interesting was the fact that, in nine of the 10 scenarios, participants in the experiment used between half and three-quarters of their savings to pay down the debt. For example, for the group that was only given $1,000 in savings, people, on average, used $570 of it to pay down their credit card debt.
For companies in the ARM industry, the results of the experiment offer insights into how consumers are going to likely behave when asked to pay down unpaid debts. Knowing how much a consumer is comfortable paying, based on how much he or she has in the bank or a wallet will help with negotiation and reaching an outcome with which both parties are satisfied.
“The importance of preserving a savings cushion was evidenced by the fact that most participants viewing these scenarios chose to retain credit card debt, and thereby preserve more of a savings cushion,” the researchers concluded. “The value participants placed on preserving savings is highlighted by those participants who chose not to pay off a hypothetical debt completely even when there would be substantial savings left over (in some cases, thousands of dollars).”
