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STUMBLING INTO DEBT? NEW STUDY FROM TNS AND HARVARD BUSINESS SCHOOL AND DARTMOUTH COLLEGE PROFESSORS FINDS THAT FINANCIAL ILLITERACY AND DEBT GO HAND-IN-HAND
February 27th, 2008
Research Reveals Only 35 Percent of Americans Understand How Compound Interest Works
(NEW YORK, February 27, 2008) – TNS, a world leader in market insight and information, today released highlights from a survey conducted in partnership with professors at Harvard Business School and Dartmouth College focused on understanding the depth of the financial illiteracy epidemic in the United States and its link to American’s troubling indebtedness.
With the November elections rapidly approaching, millions of Americans are examining each candidate’s views on the country’s economic situation. Americans with unmanageable levels of debt, which, according to TNS’ survey, include over one in four Americans, will be particularly interested in candidates’ plans to help alleviate that burden. While strengthening family finances is a complex problem, one key element is financial literacy. President Bush’s Advisory Council on Financial Literacy announced recently, underscores broad agreement on this topic. The TNS survey found disturbing patterns of financial illiteracy and indebtedness:
Only 35 percent of respondents were able to correctly estimate how interest compounds over time
More than half of respondents did not understand how minimum payments are calculated and applied to a principal balance. Almost none of the respondents understood the financial difference between paying in monthly installments versus one lump sum at the end of a certain time period
The survey also explored Americans’ comfort with their personal debts. Respondents were asked if they felt they had too little debt, just the right amount, or too much debt. A sizable fraction of respondents (26 percent) report having too much debt and another 11 percent didn’t know if they did. While firms bombard Americans with credit card solicitations, only two percent of American wished they could borrow more. People who felt they had “too much debt” tended to be younger, with lower incomes and larger families. Beyond this, the over indebted did not understand the basic working of interest rates. “There is a strong link between financial illiteracy and excessive debt,” said Prof. Peter Tufano, Sylvan C. Coleman Professor of Financial Management at Harvard Business School. “Those who severely underestimate the power of interest compounding don’t understand how quickly debts can grow. They end up with more debt than they can handle.”
What these findings show us is that financial illiteracy is pervasive. There is a widespread lack of financial know-how in America. “This epidemic is not only prevalent in the low-income demographics,” said Annamaria Lusardi, Professor of Economics at Dartmouth College. “Excessive amounts of debt and personal financial worries may make consumers hold back on their spending.”
“While the majority of respondents felt that they had a moderate amount of financial knowledge, many of those people were unable to answer the financial questions correctly," said Bob Neuhaus, Executive Vice President, Financial Services, TNS North America. “This is going to continue to be a critical issue for the current presidential candidates, as a growing percentage of the country is going to be looking to the government for help. Additionally, this creates an opportunity for financial institutions to educate their clients, laying the foundation for greater client trust.”
About the Research
The study is based on a representative national sample of 1000 people aged 18+ in the TNS 6th Dimension Access Panel. The internet-based survey was conducted during the week of November 5, 2007.
About TNS
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