Published online by Cambridge University Press: 01 October 2015
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.
We would like to thank TNS Global and, in particular, George Ravich, Bob Neuhaus, and Ellen Sills-Levy for their willingness to partner with us on this project, and Lauren Cohen, James Feigenbaum, Christopher Malloy, Adair Morse, Annette Vissing-Jorgensen, and participants at the Consumer Finance Workshop, the NBER Summer Institute on Capital Markets and the Economy, Williams College, the European Central Bank conference on Household Finances and Consumption, the Federal Reserve Bank of Chicago Symposium on Connecting Financial Education to Consumers, the Herman Colloquium at the University of Michigan, the American Economic Association Meeting in San Francisco, the George Mason School of Public Policy, the George Washington School of Business, and Harvard Business School for suggestions and comments. We are grateful to Jan-Emmanuel De Neve and Vilsa Curto for excellent research assistance and to Bill Simpson for his useful comments and advice. The authors would like to thank FINRA Investor Education Foundation and the HBS Division of Research and Faculty Development for financial support. The views expressed herein are those of the authors and do not reflect those of TNS Global.