Investment In Knowledge

Say you owe $3,000 on your credit card. You pay a minimum payment of $30 each month. At an annual percentage rate of 12 percent (or 1 percent per month), how many years would it take to eliminate your credit card debt if you made no additional new charges? This was one of three questions asked of 1,000 U.S. households in a national November 2007 survey in support of the working paper "Debt Literacy, Financial Experiences and Overindebtedness," last updated in March 2009.¹

Respondents were given five possible answers to the question. According to the paper's authors, Dartmouth College economics professor Annamaria Lusardi and Harvard Business School finance professor Peter Tufano, only 35 percent chose the correct answer—that one can never eliminate credit card debt by making minimum payments equal to the interest payments on the debt.

Citing other troubling research, the professors exposed the tip of an illiteracy iceberg in the U.S. Most pronounced among those with lower incomes and lower education levels, financial illiteracy produces myriad harms, from denied credit to ruinous financial outcomes.

As firms such as Visa, Wells Fargo and LendingTree have discovered, though, there are significant benefits to speaking up and reaching out via financial literacy education programs. For customers, the value includes better credit behavior and credit histories; for the firms, these programs can generate valuable returns on engagement.

The Cost of Illiteracy

According to AARP’s 2005 “Goodbye to Complacency” report,² a financial literacy education “movement” exploded onto the U.S. scene in the mid- to late-1990s. A wave of research followed, along with public and private organizations focused on the issue, such as the influential Jump$tart Coalition for Personal Financial Literacy. Now prominent on the national agenda, financial literacy has the attention of the SEC, the Treasury Department and the White House.

Yet, this growing awareness did not stop American consumers from draining billions in home equity dollars to pay off credit card debt, only to then sink those dollars into zero equity items like vacations and plasma televisions, “borrowing until it hurts”³ and creating the first negative savings rate since the Great Depression.⁴ This May, “stress tests” on the nation’s 19 biggest banks revealed potential losses of nearly $82.4 billion from soured credit card debt.⁵