Basic debt literacy and debt behavior

Abstract

Using unique survey data from 1001 individuals representative of the French population, we document that less than half of the sample (47%) can provide correct answers to two basic questions addressing the functioning of debt interests. This proportion is higher among credit users, but the improvement emerges mainly from mortgagors (55%) and much less from consumer credit users (51%). Furthermore, among consumer credit users, the portion of respondents giving at least one erroneous answer (i.e. neither correct nor “don't know”) is above one third and significantly higher than in the rest of the population (35% vs. 30%). Next, with regressions, controlling for a wide array of socio-demographic variables and potential confounding factors like present-biased preferences or saving-oriented literacy, we show that incorrect answers to debt literacy questions predict a greater propensity to use consumer debt and to use it in a more expensive way (i.e. choosing lower settlements). Lastly, we find that respondents who answer debt literacy questions incorrectly are not more likely to report intention to take financial education training or to seek financial advice from a bank advisor, even when such respondents also present a high propensity to use debt or to use it in an expensive way.