The Effects of Perceived and Actual Financial Knowledge on Credit Card Behavior

Abstract

This study uses a combined measure of financial literacy or financial knowledge that includes both a test score of actual financial knowledge and a self-assessment of overall financial knowledge. The combined measure provides greater understanding about how financial knowledge affects financial behavior. The study uses a large national survey of U.S. adults and households (n=28,146) to investigate how financial knowledge affects typical behaviors related to credit card use. The five behaviors include paying credit card balances on time, carrying over a balance and paying interest on it, making only a minimum payment on a credit card, being charged a late fee, and going over a credit card limit. The results from the probit analysis show that actual financial knowledge and perceived financial knowledge both significantly influence credit card behavior.