Dr. William Walstad, John T. and Mable M. Hay Professor of Economics at the UNL College of Business Administration, presented his recent research results on the effect of financial literacy
on credit card use at the 2012 Financial Literacy and Education Summit held at the Federal Reserve Bank of Chicago.
Walstad and colleague Dr. Sam Allgood, professor of economics at CBA, have been looking into the effect of financial literacy on people’s financial behaviors. “Past research just looked at the people’s test score to measure financial literacy. The contribution Sam and I make is that we look at both their actual financial knowledge as measured by test scores, and we look at their perceived financial knowledge as measured by self-ratings,” Walstad said.
Two categories were created in Walstad and Allgood’s study: financial knowledge (skills) and perception (confidence). A total of 1,488 adults were studied and sorted into four different groups: skilled and confident, unskilled and confident, skilled and insecure and unskilled and insecure. A total of five credit card behaviors were also closely examined such as paying bills on time or being charged late fees.
The data from the study produced some expected results but also provided new insights that had not previously been explored.
“We found that those who had the highest test scores and the highest confidence showed more prudent credit card behaviors. However, in cases where people had low test scores and high confidence, those people also did quite well -- so confidence, or your perception of what you know, can be as important as what you actually know,” said Walstad.
The research suggests that to influence financial behaviors financial educators should not only focus on improving test scores of financial knowledge, but at the same time focus on improving confidence in financial knowledge.
“Financial knowledge is only going to take you so far. The combination of the two (knowledge and confidence) creates a much more powerful effect in financial literacy in terms of influencing people’s behavior,” Walstad said.
Walstad and Allgood also are investigating the effects of financial literacy on financial behaviors related to investing, loans, insurance, and financial counseling. They are finding similar results.