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Debt literacy, financial experiences, and overindebtedness*

Debt literacy, financial experiences, and overindebtedness* 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Pension Economics and Finance Cambridge University Press

Debt literacy, financial experiences, and overindebtedness*

Journal of Pension Economics and Finance , Volume 14 (4): 37 – Oct 1, 2015

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References (69)

Publisher
Cambridge University Press
Copyright
Copyright © Cambridge University Press 2015 
ISSN
1475-3022
eISSN
1474-7472
DOI
10.1017/S1474747215000232
Publisher site
See Article on Publisher Site

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.

Journal

Journal of Pension Economics and FinanceCambridge University Press

Published: Oct 1, 2015

Keywords: D14; D91; Financial knowledge; numeracy; debt loads; credit card borrowing

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