| 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 measured by questions testing knowledge of
fundamental concepts related to debt and by self-assessed financial knowledge.
Financial experiences are the participants’ reported experiences with
traditional borrowing, alternative borrowing, and investing activities.
Overindebtedness is a self-reported measure. Overall, we find that debt
literacy is low: only about one-third of the population seems to comprehend
interest compounding or the workings of credit cards. Even after controlling
for demographics, we find a strong relationship between debt literacy and both
financial experiences and debt loads. Specifically, individuals with lower
levels of debt literacy tend to transact in high-cost manners, incurring
higher fees and using high-cost borrowing. In applying our results to credit
cards, we estimate that as much as one-third of the charges and fees paid by
less knowledgeable individuals can be attributed to ignorance. The less
knowledgeable also report that their debt loads are excessive or that they are
unable to judge their debt position. |