Article2015

Debt literacy, financial experiences, and overindebtedness

1,410 citations0/0 files storedJournal of Pensions Economics and Finance

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Financial Literacy, Pension, Retirement Analysis Decision-Making and Behavioral Economics Financial Literacy and Behavior

Abstract

Abstract We analyze a national sample of Americans with respect to their debt literacy, financial experiences, and their judgments about the extent of their indebtedness. Debt literacy is a component of broader financial understanding that measures knowledge about debt and self-assessed financial knowledge. Financial experiences are the participants’ reported experiences with traditional borrowing, alternative borrowing, and investing. Overindebtedness is a self-reported measure. Debt literacy is low, with only about one-third of the population grasping the basics of interest compounding. Even after controlling for demographics, we find a relationship between debt literacy and both financial experiences and debt loads. Individuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using high-cost borrowing. We provide a rough estimate of the national implications of debt ignorance on credit card costs by consumers. Less knowledgeable individuals also report that their debt loads are excessive or that they are unable to judge their debt position.

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References

2014The Economic Importance of Financial Literacy: Theory and Evidence 2007Financial Literacy and Stock Market Participation 2006Household Finance 2007Baby Boomer retirement security: The roles of planning, financial literacy, and housing wealth 2011Financial literacy around the world: an overview 2010Financial Literacy among the Young 2003Household Financial Management: The Connection between Knowledge and Behavior 2007Financial Literacy and Retirement Preparedness: Evidence and Implications for Financial Education

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