Academic journal article Monthly Labor Review

Financial Literacy

Academic journal article Monthly Labor Review

Financial Literacy

Article excerpt

In a timely and provocative new study published by the National Bureau of Economic Research entitled "Debt Literacy, Financial Experiences, and Overindebtedness" (NBER Working Paper No. 14808, March 2009), economists Annamaria Lusardi and Peter Tufano analyze a national sample of Americans with regard to their basic financial knowledge related to debt--what the authors call "debt literacy"--as well as their actual financial experiences and their self-assessment of their personal finances and level of debt. The authors reach some interesting and perhaps not surprising conclusions. They find that, in general, debt literacy is low: only a third of the respondents seemed to grasp such relevant financial topics as compound interest and the basic workings of credit cards. Further, even when they control for various demographic characteristics,

Lusardi and Tufano find a "strong relationship" between debt literacy and both financial experience and debt burden. Specifically, those with less knowledge and understanding of how the U.S. financial system works tend to incur more high-cost debt services (higher interest rates and fees, for example) and experience a greater debt burden than those with more knowledge. The authors estimate that as much as one-third of the charges paid by the less knowledgeable are due to ignorance as opposed to other demographic factors. …

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