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Financial Literacy and Consumer Credit Portfolios

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  • Richard Disney
  • John Gathergood

Abstract

We use survey data from a sample of UK households to analyse the association between financial literacy and consumer credit portfolios. Among users of consumer credit there is much variation in levels of financial literacy. Borrowers with poor financial literacy hold higher shares of high cost credit (such as home collected credit, mail order catalogue debt and payday loans) than those with higher literacy. We estimate the cost of poor financial literacy in a multivariate setting by calculating the difference in average APRs paid by more and less literate consumers. We also show that households with poor financial literacy are typically self-aware: they are more likely to lack confidence when interpreting credit terms, and to exhibit confusion over financial concepts. They are also less likely to engage in behaviour which might help them to improve their financial literacy and awareness of the credit market.

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Bibliographic Info

Paper provided by University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM) in its series Discussion Papers with number 12/06.

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Handle: RePEc:not:notcfc:12/06

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Keywords: financial literacy; consumer credit; debt portfolios;

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References

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  1. Xavier Gabaix & David Laibson, 2005. "Shrouded Attributes, Consumer Myopia, and Information Suppression in Competitive Markets," NBER Working Papers 11755, National Bureau of Economic Research, Inc.
  2. Luigi Guiso & Tullio Jappelli, 2008. "Financial Literacy and Portfolio Diversification," EIEF Working Papers Series 0812, Einaudi Institute for Economics and Finance (EIEF), revised Oct 2008.
  3. Angela A. Hung & Andrew M. Parker & Joanne K. Yoong, 2009. "Defining and Measuring Financial Literacy," Working Papers 708, RAND Corporation Publications Department.
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  8. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
  9. Carin van der Cruijsen & Jakob de Haan & David-Jan Jansen & Robert Mosch, 2011. "Household savings behaviour in crisis times," DNB Working Papers 315, Netherlands Central Bank, Research Department.
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  16. Laibson, David I. & Agarwal, Sumit & Driscoll, John C. & Gabaix, Xavier, 2009. "The Age of Reason: Financial Decisions over the Life-Cycle with Implications for Regulation," Scholarly Articles 4554335, Harvard University Department of Economics.
  17. Annamaria Lusardi & Peter Tufano, 2009. "Debt Literacy, Financial Experiences, and Overindebtedness," NBER Working Papers 14808, National Bureau of Economic Research, Inc.
  18. Stephan Meier & Charles Sprenger, 2010. "Present-Biased Preferences and Credit Card Borrowing," American Economic Journal: Applied Economics, American Economic Association, vol. 2(1), pages 193-210, January.
  19. Lauren E. Willis, 2011. "The Financial Education Fallacy," American Economic Review, American Economic Association, vol. 101(3), pages 429-34, May.
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Cited by:
  1. Elisabeth Beckmann & Helmut Stix, 2014. "Foreign currency borrowing and knowledge about exchange rate risk," Working Papers 188, Oesterreichische Nationalbank (Austrian Central Bank).

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