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Financial Literacy and Consumer Credit Portfolios

  • Richard Disney
  • John Gathergood

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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File URL: http://www.nottingham.ac.uk/cfcm/documents/papers/12-06.pdf
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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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  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, 2009. "Financial Literacy and Portfolio Diversification," CSEF Working Papers 212, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
  3. Sumit Agarwal & John C. Driscoll & Xavier Gabaix & David Laibson, 2009. "The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 40(2 (Fall)), pages 51-117.
  4. Maarten van Rooij & Annamaria Lusardi & Rob Alessie, 2007. "Financial Literacy and Stock Market Participation," CeRP Working Papers 66, Center for Research on Pensions and Welfare Policies, Turin (Italy).
  5. 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.
  6. John Y. Campbell, 2006. "Household Finance," NBER Working Papers 12149, National Bureau of Economic Research, Inc.
  7. Angela A. Hung & Andrew M. Parker & Joanne K. Yoong, 2009. "Defining and Measuring Financial Literacy," Working Papers 708, RAND Corporation Publications Department.
  8. Jappelli, Tullio & Padula, Mario, 2013. "Investment in financial literacy and saving decisions," Journal of Banking & Finance, Elsevier, vol. 37(8), pages 2779-2792.
  9. James Banks & Cormac O'Dea & Zoë Oldfield, 2010. "Cognitive Function, Numeracy and Retirement Saving Trajectories," Economic Journal, Royal Economic Society, vol. 120(548), pages F381-F410, November.
  10. Tullio Jappelli, 2010. "Economic Literacy: An International Comparison," Economic Journal, Royal Economic Society, vol. 120(548), pages F429-F451, November.
  11. 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.
  12. Sumit Agarwal & Souphala Chomsisengphet & Chunlin Liu & Nicholas S. Souleles, 2006. "Do consumers choose the right credit contracts?," Working Paper Series WP-06-11, Federal Reserve Bank of Chicago.
  13. Meier, Stephan & Sprenger, Charles, 2009. "Present-Biased Preferences and Credit Card Borrowing," IZA Discussion Papers 4198, Institute for the Study of Labor (IZA).
  14. van Rooij, Maarten C.J. & Lusardi, Annamaria & Alessie, Rob J.M., 2011. "Financial literacy and retirement planning in the Netherlands," Journal of Economic Psychology, Elsevier, vol. 32(4), pages 593-608, August.
  15. Peter Tufano, 2009. "Consumer Finance," Annual Review of Financial Economics, Annual Reviews, vol. 1(1), pages 227-247, November.
  16. Annamaria Lusardi & Peter Tufano, 2009. "Debt Literacy, Financial Experiences, and Overindebtedness," NBER Working Papers 14808, National Bureau of Economic Research, Inc.
  17. Lauren E. Willis, 2011. "The Financial Education Fallacy," American Economic Review, American Economic Association, vol. 101(3), pages 429-34, May.
  18. Victor Stango & Jonathan Zinman, 2009. "Exponential Growth Bias and Household Finance," Journal of Finance, American Finance Association, vol. 64(6), pages 2807-2849, December.
  19. Haliassos, Michael & Bertaut, Carol C, 1995. "Why Do So Few Hold Stocks?," Economic Journal, Royal Economic Society, vol. 105(432), pages 1110-29, September.
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