On the financial literacy, indebtedness, and wealth of Colombian households

Abstract

AbstractIn this paper we attempt to find existing linkages of financial literacy with indebtedness and wealth accumulation of households in Bogotá, the capital of Colombia. We analyze an econometric model where we regress a household’s debt usage, cost of debt servicing, and wealth indicators against its financial literacy. Financial literacy is assessed according to the financial numeracy and money management skills of the head of households. Numeracy skills are found to have a positive correlation with the decision to use debt and have a mortgage and with the total number of lending sources, debt‐to‐income, and net worth. Money management skills decrease the household’s likelihood of using all of the debt types considered in the analysis and increase with net worth. We also uncover important debt and wealth accumulation conducts closely tied to the city’s economic stratification and the gender of the head of household. A number of public policy implications are derived from the results of the analysis.