Financial Literacy Helps: Study

Blog:

MAS Team | 11 September 2012

Sumit Agarwal, senior financial economist at the Federal Reserve Bank of Chicago and visiting professor at the Indian School of Business (ISB), investigated whether financial education programmes are effective in improving financial literacy and financial behaviour. His verdict, “Though the evidence is mixed, it appears that some financial education programmes do improve the behaviour and outcomes of their graduates. The effects appear to be strongest for the most financially vulnerable, especially those with low incomes and levels of education. However, the relationships among financial education, financial literacy, and financial behaviour and outcomes are not straightforward. Some financial education programmes improve financial literacy, but not financial behaviour; others lead to improved behaviour and outcomes without improving financial literacy; and still others do not appear to be effective at all.”

Other findings of the study indicate that:

• 40% of the total credit consumers make mistakes while choosing a credit contract and over time consumers learn from their mistakes. The larger the costs, the more likely consumers will correct their mistakes.

• Over a four-year period, credit card fees payments dropped by 75%. Consumers’ hard-earned knowledge does not persist and overtime tend to forget about credit card payments. Experience produces learning, but only when the feedback is recent.

• Consumers make least credit mistakes by their 53rd birthday. The findings were consistent across an array of credit instruments—credit card fee payments, credit card interest payments and interest rates on mortgages, auto loans, home loans and credit lines for small business.

• Financial literacy level of Indians is 20% more than US consumers. Pre-mortgage literacy programmes are effective in the US because riskier consumers and lenders leave the market and not because the remaining borrowers choose better mortgage products.

• Indians use about 38% of monthly income to cover monthly expenses–they save or invest 62% of their salary on average.

Last, the study found that making credit mistakes also depends on cognitive abilities of borrowers. Consumers who have higher math and verbal language scores are less likely to make balance transfer and home prices estimation mistakes.

Read the complete research here.

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