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U.S. adults know surprisingly little about basic financial issues, such as compound interest, credit risk, investments and inflation, a new study from Champlain College finds.
Many also routinely make avoidable financial mistakes, the December 2016 National Report Card on Adult Financial Literacy found, needlessly putting their credit and long-term financial health at risk.
Overall, researchers at the Vermont college gave U.S. consumers a grade of C in financial literacy after evaluating a wide range of financial literacy markers, including financial knowledge, personal finance education and financial behavior.
Researchers also looked at individual states’ performances and found huge regional differences, due in part to wide disparities in financial knowledge, credit scores and financial education. For example, most states in the South were given failing grades in financial literacy, while much of the North and Northeast earned at least a B or higher.
The report also gives each state a Credit Card Grade, factoring in whether residents always pay in full, carried balances with interest charged, made only minimum monthly payments, credit card delinquency rate and credit card balance as a percent of household income.
The five states with the highest Credit Card Grades, in order, are Minnesota (A+), South Dakota (A), Iowa (A), North Dakota (A) and New Jersey (A-). The five states with the lowest Credit Card Grades are (from bad to worst and all F’s) are Mississippi, Louisiana, New Mexico, Arkansas and West Virginia.
Researchers point out, though, that states with passing grades still have much work to do.
“Our new report uses a relative grading system. Thus, if a state receives a good grade, it may only mean they are the best in a class of poor students,” Champlain’s Center for Financial Literacy Director John Pelletier wrote in the report. “Every state in our nation has dramatic room for improvement.”
Based on the data, no state received a final grade of A+ or A. More than three-quarters of adult Americans (77 percent) reside in states that have a grade of C or lower, and more than a quarter (28 percent) live in 12 states with grades of D or F.
For example, the study found more than 20 percent of Americans fail to pay their debts on time, while fewer than half have good to excellent credit. As many other studies have found, Americans aren’t saving nearly as much money as experts recommend either, making it more likely that we’ll fall behind if faced with a sudden or unexpected emergency.
For example, according to the Champlain College study:
The five states with the highest overall financial literacy grades are (in order) Minnesota (A-), North Dakota (A-), Utah (A-), Hawaii (A-) and Wyoming (B). The five states with the lowest grades (from bad to worst) are Alabama (D), Oklahoma (D), Arkansas (D), Louisiana (D) and Mississippi (F).
Dan Kadlec, founder and editor of Right About Money, a financial literacy website, wrote about the study on Dec. 12 and says, due to the weighting of the grades, “Even the top-ranked states are pretty bad.”
The study shows “we’ve got a long way to go,” he says. “Whatever momentum we had since the financial crisis has slowed, and this shows we’re losing the battle.”
For example, Americans are having a hard time juggling expenses and are putting themselves at risk of becoming over-leveraged.
“The number of financial decisions an American citizen has to make continues to increase, and the variety and complexity of financial products continues to grow,” Pelletier wrote in the report.
“Adults often do not fully understand debit and credit cards, mortgages, banking, investment and insurance products and services, retirement planning and many other financial topics.” As a result, they often make poor decisions that harm their long-term financial interests.
How can Americans improve their financial literacy? “You can put Band-Aids on things all you want,” Kadlec says, “but the only long-term solution is to bake financial literacy into the school day every day.”
A mandatory high school finance course covering credit management and student debt would help, he adds.
“The solution needs to be a long-term one,” Kadlec says. “If you want it to last, you have to start with the kids.”
See related: Alaska, New Mexico have heaviest card debt burdens