A generation ago most consumers’ relationships with financial markets stopped with checking accounts, savings plans and maybe direct debits to pay a few bills. Today customers have an increasingly direct stake in the fortunes of money market investments. They track mutual funds, certificates of deposit, government bonds, and other instruments which were previously the business of others to follow. Retail financial markets have become more complex and sophisticated, offering not just smarter credit cards, but also a range of services (and restrictions) with myriad opportunities, often complex fees, and sometimes serious financial risks.
Improving Financial Literacy, the first major study of financial education in OECD countries, examines the economic, demographic and policy changes that make it crucial for consumers to become financially astute. The Prudential-sponsored report finds that many consumers get their financial advice out of magazine or Internet articles, sometimes with titles like “Where to Stash Cash for College” or “Saving for Retirement on $5 a Day”.
Furthermore, financial literacy is not just a matter of being savvy about the fine print. Improving Financial Literacy found that almost 40% of adults and students think the statement “Money holds its value well in times of inflation” is correct. More than a third of students surveyed admit they do not know what the effect of an increase in interest rates would be on savings.
Could this be why so many consumers are becoming over-indebted? According to Improving Financial Literacy, over-indebtedness is acutely serious in the US, where in 2003, 1.6 million households (around 9% of all households) filed for personal bankruptcy. By comparison, in England and Wales in 2004 these accounted for some 0.1% of the population, while in Korea as of January 2004, delinquent borrowers totalled 3.2% of the working age population.
Improving Financial Literacy argues that this can be reduced. It cites a study showing that when borrowers received pre-purchase counselling, the 90-day delinquency rate was 34% lower than among similar borrowers without counselling. Furthermore, the delinquency rate was slightly less than that for those receiving classroom and home study training, as opposed to telephone counselling.
ISBN 9264012567. See the New Publications pages or www.oecdbookshop.org for ordering details.
©OECD Observer No 251, September 2005