Chances are slim that you know what you owe

A credit card user displays her cards in Washington February 22, 2010.

The author is a Reuters contributor. The opinions expressed are his own.

By Matt Stroud

(Reuters) - When Colin Nederkoorn, 29, moved from Boston to New York City for a new job in 2008, he didn't spare many expenses. He rented a Manhattan apartment, bought new furniture and took advantage of the city's night life.

That spending lead to financial trouble.

"I was basically putting everything on my credit card," he said.

By November 2010, Nederkoorn was nearly $10,000 in debt while earning only a fraction of that amount every month (see chart: here). "I realized I wasn't really keeping track of my credit card debt and it was getting out of control," he said.

According to a recent study from the New York Federal Reserve, Nederkoorn is not alone. The study, "Do We Know What We Owe? A Comparison of Borrower- and Lender-Reported Consumer Debt," found that while borrowers and lenders tend to agree about perceived debt owed on mortgages and vehicle loans, there's disparity over credit card debt. Borrowers claim they owe less than 50 percent of the aggregate credit card debt lenders reported, according to the study.

William Droms, professor of finance at Georgetown University's McDonough School of Business, said the disparity amounts to credit card delusion. "A lot of people don't want to admit to themselves that they're paying 20 percent interest on a credit card," he said.

Droms' advice? Keep close track of finances, because ideally, no one should have credit card debt.

"What gets measured gets done," he said. "Count what you're spending, make a simple list and at the end of the month, add everything up. Then pick the card with the lowest balance and pay it down to zero."

Neil Ellington, executive vice president of CESI Debt Solutions, a nonprofit that works with people one-on-one to create and stick with a debt-shedding plan, concurred but said ignorance, not delusion, is the reason to explain why some are in severe credit card debt.

"People come into my office thinking they owe $5,000 and at the end of the conversation, they realize they're $17,000 in debt," he said. His advice: use the ATM.

"You want to actually take money out and put it into your wallet," he said. "Spend with that instead of using your credit card. Because with an ATM, every swipe is equal. Which is not the case with credit cards."

Ellington equates debt elimination to weight loss.

"There's a lot of failure and hype to getting rid of debt," he said. "Education and awareness will help a significant part of the population. But just like weight loss, some people can do it on their own and others need to go to Jenny Craig."

Rod Ebrahimi, CEO of ReadyForZero.com, worked with former Google and Microsoft employees to create an online platform to help people manage their credit card debts, and he argued that education is key to knowing how interest rates affect your bottom line.

"People don't know any better when they get a credit card," he said. "Your credit score can be good because you're paying your bills but then you get a credit card that has a 20 percent. You keep racking up your debt and paying the small minimum monthly payments. Suddenly it's exponential. You go from paying $20 per month to $400."

Nederkoorn found himself in that situation. After setting up an account with ReadyForZero, it took him a little less than a year to pay off his $10,000 debt.

He succeeded because he finally faced reality.

"I was aware of the dangers of credit cards before I got into this," he said. "I just thought I was smarter than the credit card companies. It turns out that credit card companies are smarter than me."

(Editing by Linda Stern and Beth Gladstone)