Hostname: page-component-78c5997874-xbtfd Total loading time: 0 Render date: 2024-11-10T15:58:05.816Z Has data issue: false hasContentIssue false
  • English
  • Français

Debt literacy, financial experiences, and overindebtedness*

Published online by Cambridge University Press:  01 October 2015

ANNAMARIA LUSARDI  and
PETER TUFANO
ANNAMARIA LUSARDI
Affiliation:
The George Washington University School of Business, Washington, DC (e-mail: alusardi@gwu.edu)
PETER TUFANO
Affiliation:
Saïd Business School, Oxford University, Oxford, UK (e-mail: peter.tufano@sbs.ox.ac.uk)
Get access Rights & Permissions [Opens in a new window]

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.

Keywords

D14D91Financial knowledgenumeracydebt loadscredit card borrowing
Type
Articles
Information
Journal of Pension Economics & Finance , Volume 14 , Special Issue 4: Household Finance , October 2015 , pp. 332 - 368
Copyright
Copyright © Cambridge University Press 2015 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

*

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.

References

Agarwal, Sumit and Mazumder, Bhashkar (2013) Cognitive abilities and household financial decision making. American Economic Journal: Applied Economics, 5(1): 193–207.Google Scholar
Agarwal, Sumit, Driscoll, John, Gabaix, Xavier and Laibson, David (2009) The age of reason: financial decisions over the lifecycle with implications for regulation. Brookings Papers on Economic Activity. Fall, pp. 51–101.Google Scholar
Bernheim, Douglas (1995) Do households appreciate their financial vulnerabilities? An analysis of actions, perceptions, and public policy. In Tax Policy and Economic Growth. Washington, DC: American Council for Capital Formation, pp. 1–30.Google Scholar
Bernheim, Douglas (1998 ) Financial illiteracy, education and retirement saving. In Mitchell, Olivia S. and Schieber, Sylvester (eds), Living with Defined Contribution Pensions. Philadelphia: University of Pennsylvania Press, pp. 38–68.Google Scholar
Bucks, Brian, Kennickell, Arthur, Mach, Tracy and Moore, Kevin (2009) Changes in U.S. Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances. Federal Reserve Bulletin, February 2009.Google Scholar
Campbell, John (2006) Household finance. Journal of Finance, 61: 1553–1604.Google Scholar
Chen, Haipeng and Rao, Akshay (2007) When two plus two is not equal to four: errors in processing multiple percentage changes. Journal of Consumer Research, 34: 327–340.Google Scholar
Choi, James, Laibson, David, Madrian, Brigitte and Metrick, Andrew (2003) Optimal Defaults. American Economic Review Papers and Proceedings, 93: 180–185.Google Scholar
Choi, James, Laibson, David, Madrian, Brigitte and Metrick, Andrew (2004 a) For better or for worse: default effects and 401(k) savings behavior. In Wise, David (ed.), Perspectives in the Economics of Aging. Chicago: University of Chicago Press, pp. 81–121.Google Scholar
Choi, James, Laibson, David and Madrian, Brigitte C. (2004 b) Plan design and 401(k) savings outcomes. National Tax Journal, 57(2): 275–298.Google Scholar
Christelis, Dimitris, Jappelli, Tullio and Padula, Mario (2010) Cognitive abilities and portfolio choice. European Economic Review, 54: 18–38.Google Scholar
de Bassa Scheresberg, Carlo (2013) Financial literacy and financial behavior among young adults: evidence and implications. Numeracy, 6(2).Google Scholar
de Bassa Scheresberg, Carlo and Lusardi, Annamaria (2013) Financial literacy and high-cost borrowing in the United States. NBER Working Paper, No. 18969, April 2013.Google Scholar
Disney, Richard and Gathergood, John (2013) Financial literacy and consumer credit portfolios. Journal of Banking and Finance, 37, 2246–2254.Google Scholar
Gathergood, John (2012) Self-control, financial literacy and consumer over-indebtedness. Journal of Economic Psychology, 33: 590–602.Google Scholar
Georgarakos, Dimitris, Haliassos, Michael and Pacini, Giacomo (2014) Household debt and social interactions. Review of Financial Studies, 27(5): 1404–1433.Google Scholar
Gerardi, Kristopher, Goette, Lorenz and Meier, Stephan (2013) Numerical ability predicts mortgage default. Proceedings of the National Academy of Sciences, 110: 11267–11271.Google Scholar
Hastings, Justine and Tejeda-Ashton, Lydia (2008) Financial literacy, information, and demand elasticity: survey and experimental evidence from Mexico. NBER Working Paper, No 14538.Google Scholar
Hilgert, Marianne, Hogarth, Jeanne and Beverly, Sondra (2003) Household financial management: the connection between knowledge and behavior. Federal Reserve Bulletin, 309–332.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2007) Baby boomer retirement security: the role of planning, financial literacy, and housing wealth. Journal of Monetary Economics, 54: 205–224.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia (2008) Planning and financial literacy: how do women fare? American Economic Review, 98(2): 413–417.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2009) How ordinary consumers make complex economic decisions: financial literacy and retirement readiness. NBER Working Paper, No. 15350.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2011a) Financial literacy and planning: implications for retirement wellbeing. In Mitchell, Olivia S. and Lusardi, Annamaria (eds), Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford: Oxford University Press, pp. 17–39.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2011b) Financial literacy around the world: an overview. Journal of Pension Economics and Finance, 10(4): 497–508.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2011c) Financial literacy and retirement planning in the United States. Journal of Pension Economics and Finance, 10(4): 509–525.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2013) Debt and Debt Management among Older Adults. GFLEC Working Paper, No. 2013-2.Google Scholar
Lusardi, Annamaria and Mitchell, Olivia S. (2014) The economic importance of financial literacy: theory and evidence. Journal of Economic Literature, 52(1): 5–44.Google Scholar
Lusardi, Annamaria and Tufano, Peter (2009) Debt literacy, financial experiences and overindebtedness. NBER Working Paper, No. 14808.Google Scholar
McCarthy, Yvonne (2011) Behavioural Characteristics and Financial Distress. European Central Bank Working Paper, No. 1303, February 2011.Google Scholar
Meier, Stephan and Sprenger, Charles (2010) Present-biased preferences and credit card borrowing. American Economic Journal: Applied Economics, 2(1): 193–210.Google Scholar
Moore, Danna (2003) Survey of financial literacy in Washington state: knowledge, behavior, attitudes, and experiences. Technical Report No. 03-39, Social and Economic Sciences Research Center, Washington State University.Google Scholar
Perry, Vanessa and Morris, Marlene (2005) Who is in control? The role of self-perception, knowledge, and income in explaining consumer financial behavior. Journal of Consumer Affairs, 39: 299–313.Google Scholar
Peters, Ellen, Hibbard, Judith, Slovic, Paul and Dieckmann, Nathan (2007) Numeracy skills and the communication, comprehension, and use of risk-benefit information. Health Affairs, 26(2): 741–748.Google Scholar
Stango, Victor and Zinman, Jonathan (2009) Exponential growth bias and household finance. Journal of Finance, 64: 2807–2849.Google Scholar
van Rooij, Maarten, Lusardi, Annamaria and Alessie, Rob (2011) Financial literacy and stock market participation. Journal of Financial Economics, 101(2): 449–472.Google Scholar
Ward, Joe (1963) Hierarchical grouping to optimize an objective function. Journal of the American Statistical Association, 58: 236–244.Google Scholar
Yoong, Joanne (2011) Financial illiteracy and stock market participation: evidence from the RAND American Life Panel. In Mitchell, Olivia S. and Lusardi, Annamaria (eds), Financial Literacy: Implications for Retirement Security and the Financial Marketplace. Oxford: Oxford University Press, pp. 76–97.Google Scholar