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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," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100383, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc14:100383
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    References listed on IDEAS

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    6. Bucher-Koenen, Tabea & Ziegelmeyer, Michael, 2011. "Who lost the most? Financial Literacy, Cognitive Abilities, and the Financial Crisis," MEA discussion paper series 11234, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
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    Cited by:

    1. Bannier, Christina E. & Neubert, Milena, 2016. "Gender differences in financial risk taking: The role of financial literacy and risk tolerance," Economics Letters, Elsevier, vol. 145(C), pages 130-135.
    2. Grohmann, Antonia & Kouwenberg, Roy & Menkhoff, Lukas, 2014. "Roots of Financial Literacy," Annual Conference 2014 (Hamburg): Evidence-based Economic Policy 100550, Verein für Socialpolitik / German Economic Association.
    3. Bannier, Christina E. & Schwarz, Milena, 2017. "Skilled but unaware of it: Occurrence and potential long-term effects of females' financial underconfidence," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168188, Verein für Socialpolitik / German Economic Association.
    4. Villarreal, Francisco G., 2014. "Financial Services and Household Inequality in Mexico," MPRA Paper 57075, University Library of Munich, Germany.
    5. Neubert, Milena & Bannier, Christina E., 2016. "Actual and perceived financial sophistication and wealth accumulation: The role of education and gender," Annual Conference 2016 (Augsburg): Demographic Change 145593, Verein für Socialpolitik / German Economic Association.
    6. Grohmann, Antonia & Kouwenberg, Roy & Menkhoff, Lukas, 2015. "Childhood roots of financial literacy," Journal of Economic Psychology, Elsevier, vol. 51(C), pages 114-133.
    7. Da Silva, Sergio & Da Costa Jr, Newton & Matsushita, Raul & Vieira, Cristiana & Correa, Ana & De Faveri, Dinorá, 2017. "Debt of high-income consumers may reflect leverage rather than poor cognitive reflection," MPRA Paper 79518, University Library of Munich, Germany.

    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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