Abstract
Purpose – We study how financial illiteracy affects the probability of a derogatory mark on the customer’s credit history. Design/methodology/approach – We use the National Survey on Financial Inclusion in Brazil together with information on financial instrument usage and spending provided by the head of the household. To estimate the impact of financial illiteracy on the probability of a derogatory mark we use a logistic model to compute the odds ratio. Findings – Our main result is that financially illiterate individuals have between 57% and 143% more chance of having a derogatory mark. We find that age, income, expenses, and retirement positively affect the probability of a derogatory mark, while marriage has a negative impact. Gender does not have any impact over the probability of derogatory mark. Originality/value – The study uses a new proxy for financial illiteracy and correlates it to the investment and debt decisions of a family using a unique dataset.
Highlights
The Brazilian Central Bank and Serasa Experian have recorded increasing rates for the total number of credit defaults or payment delays over the last few years in Brazil
Moore (2003) argues that individual levels of financial literacy cannot be measured directly. He recommends the use of proxies to identify whether the individual has satisfactory financial literacy
Our main result is that financially illiterate individuals have between 57% and 143% more chance of having a derogatory mark on their credit history depending on the choice of controls
Summary
The Brazilian Central Bank and Serasa Experian have recorded increasing rates for the total number of credit defaults or payment delays over the last few years in Brazil. We tackle the relationship between financial illiteracy and defaults by using individual investment choice and consumer credit history. Our main hypothesis is that financially illiterate individuals have more chance of being added to a default list and having a derogatory mark. Our main result is that financially illiterate individuals have between 57% and 143% more chance of having a derogatory mark on their credit history depending on the choice of controls. This article is organized as follows: Section 2 briefly describes the relationship between credit defaults, financial literacy, and capitalization bonds and how they work.
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