Financial Illiteracy Runs High: Survey

The financial trouble that faces many Americans may be largely attributable to financial illiteracy, according to the survey of 1,000 Americans over 18.  

The survey found that only 35 percent of respondents understood how interest compounds over time; more than half did not know how minimum payments are calculated and applied to a principal balance; and 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.

“There is a strong link between financial illiteracy and excessive debt,” said Peter Tufano, Sylvan C. Coleman professor of financial management at Harvard Business School in a prepared statement. “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.”

Additionally, the survey found that a little more than a quarter felt they had too much debt and 11 percent didn’t know if they did. Only two percent of respondents said they wanted to borrow more.

“This epidemic is not only prevalent in the low-income demographics,” added Annamaria Lusardi, Professor of Economics at Dartmouth College, upon the survey’s release. “Excessive amounts of debt and personal financial worries may make consumers hold back on their spending.”