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Knowing What Not To Do: Financial Literacy and Consumer Credit Choices

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  • Jaroszek, Lena
  • Dick, Christian D.

Abstract

We analyze whether the frequent use of credit lines is rational or influenced by behavioral traits of households. We consider the special case of Germany where credit lines on current accounts are available to 80% of the population. We document that the excessive usage of costly credit lines is more likely for people who give intuitive but incorrect answers in the Cognitive Reflection Test. Our analysis of a rich sample of household data also provides evidence that a higher level of financial literacy can help to improve consumer credit choices.

Suggested Citation

  • Jaroszek, Lena & Dick, Christian D., 2014. "Knowing What Not To Do: Financial Literacy and Consumer Credit Choices," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100383, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc14:100383
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    Cited by:

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    2. Villarreal, Francisco G., 2014. "Financial Services and Household Inequality in Mexico," MPRA Paper 57075, University Library of Munich, Germany.
    3. Neubert, Milena & Bannier, Christina E., 2016. "Actual and perceived financial sophistication and wealth accumulation: The role of education and gender," VfS Annual Conference 2016 (Augsburg): Demographic Change 145593, Verein für Socialpolitik / German Economic Association.
    4. Sergio Da Silva & Newton Da Costa Jr & Raul Matsushita & Cristiana Vieira & Ana Correa & Dinorá De Faveri, 2018. "Debt of high-income consumers may reflect leverage rather than poor cognitive reflection," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 10(1), pages 42-52, March.
    5. Angel, Stefan, 2018. "Smart tools? A randomized controlled trial on the impact of three different media tools on personal finance," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 74(C), pages 104-111.
    6. Grohmann, Antonia & Kouwenberg, Roy & Menkhoff, Lukas, 2014. "Roots of Financial Literacy," VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100550, Verein für Socialpolitik / German Economic Association.
    7. Bannier, Christina E. & Schwarz, Milena, 2017. "Skilled but unaware of it: Occurrence and potential long-term effects of females' financial underconfidence," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168188, Verein für Socialpolitik / German Economic Association.
    8. Bannier, Christina E. & Schwarz, Milena, 2018. "Gender- and education-related effects of financial literacy and confidence on financial wealth," Journal of Economic Psychology, Elsevier, vol. 67(C), pages 66-86.
    9. Łukasz Kurowski, 2021. "Household’s Overindebtedness during the COVID-19 Crisis: The Role of Debt and Financial Literacy," Risks, MDPI, vol. 9(4), pages 1-19, March.
    10. Grohmann, Antonia & Kouwenberg, Roy & Menkhoff, Lukas, 2015. "Childhood roots of financial literacy," Journal of Economic Psychology, Elsevier, vol. 51(C), pages 114-133.

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    More about this item

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • I20 - Health, Education, and Welfare - - Education - - - General

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