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Consumers have become less positive about their credit situation since last month, according to the latest findings of the Experian-Gallup Personal Credit Index. Currently the Index is at 82, down from last month's benchmark score of 100. The decline reflects respondents' growing concern about their credit future. The Future Situation Index dropped 13 points, from 59 to 46. The Present Situation Index also dropped, but by just five points, now at 36. The Personal Credit Index is the sum of the Present and Future Index scores. The survey shows that the decline was driven largely by pessimism among younger consumers (under age 30) regarding their credit future.
Age isn't the only factor driving the drop in future credit expectations. The Experian-Gallup Personal Credit Index revealed income was also a significant factor affecting perceptions on both ends of the income spectrum. Respondents earning less than $40,000 per year as well as those earning in excess of $75,000 per year demonstrated a similar decline in confidence regarding their credit situation — a 26-point drop from March 2005. By contrast, the overall credit outlook among middle income respondents (those earning $40,000-$75,000 per year) remained unchanged.
According to the April 2005 Experian-Gallup Personal Credit Index, almost 1 in 5 (or 21%) Americans report being in the red to the Internal Revenue Service (IRS) in 2004. The average amount owed this year is $2,205. When it comes to paying their taxes, one option some Americans are turning toward is borrowing - which includes the use of credit cards.
- About 1 in 5 (or 21%) Americans owe money to the IRS this year.
- About 1 in 12 (or 8%) of the people who owe money to the IRS expect to borrow the money using loans or credit cards.
- About half (or 49%) of those getting tax refunds are using the money to pay off past debt.
Another tax payment option is the IRS payment plan. Forty percent of Americans owing taxes are unaware that the IRS offers this option. The IRS offers installment agreements to those who owe on their income taxes. An installment agreement allows the taxpayer to create a payment plan in monthly, more manageable amounts. However, it does involve user fees, interest rates, and even substantial payment penalties — a total cost potentially higher than some credit cards. The consumer may also be subjected to a Notice of Federal Tax Lien that can also negatively affect their credit. Of the 21% who owe money to the IRS this year, about 1 in 5 (or 19%) plan to use the IRS installment plan to pay their taxes.
These findings regarding taxation and debt are especially worrisome given the impending rise in interest rates. A rise in interest rates can significantly increase the initial debt a consumer incurs from borrowing money from a credit card or the government. For example, by using a credit card to pay taxes, the average $2,205 tax debt would take two years and three months to pay off (assuming 17.5% interest with payments of $100 a month). The consumer is also paying an extra $475 in interest — more than 20% of the original debt.
Methodology
The Experian-Gallup Personal Credit Index surveys a nationally representative sample of 1,000 or more respondents on core questions relating to their credit health. Issues will focus on perceptions based on their current and future debt load, credit score, borrowing, and repayment ability. Each month, the Experian-Gallup Personal Credit Index calculates respondents' ever-changing attitudes as it relates to their current credit situation and future expectations.
The margin of error for the whole sample is +/- 3%. The margin of error for the sub-sample of people who owe money on their taxes is +/- 7%.
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Consumers Less Optimistic About Their Credit Future
Experian-Gallup Personal Credit Index drops 18 points from March 2005:
- Shows growing concern over the perceived future borrowing climate in the US.
- Reflects growing concern over their ability to handle monthly bills in the future.
About 1 in 12 Use Loans or Credit Cards to Pay Taxes
Method of Paying 2004 IRS Taxes
(Based on Respondents Who Owe Taxes)
Almost Half Use Tax Refunds to Pay Off Old Debts
Planned Uses of 2004 Tax Refunds
(Based on Respondents Receiving Tax Refund)
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