Take-Aways from a Government Report on Financial Education
I recently read a new report from the U.S. Treasury Department titled Federal Financial Literacy Reform: Coordinating and Improving Financial Literacy Efforts. While the bulk of the report repeatedly encouraged federal government agencies to coordinate their financial education efforts more effectively, there were also some “nuggets” for everyday people. Below is some take-away information that stood out to me:
¨ Financial education helps to reduce “information asymmetry.” This is where the provider of a financial product or service knows more about it than consumers do. Individuals who are financially savvy are better able to avoid frauds and scams and sidestep risks that they do not fully understand.
¨ Financial education also helps society avoid “negative externalities” that result from a less financially capable population. Examples include lender write-offs of unpaid debt and the costs of a person’s poor financial decisions that is borne by friends and family, government agencies, and others. Stated another way, financial education plays an important role in the prosperity and financial health of the nation.
¨ About 6.5% of U.S. households are “unbanked.” This means that they lack a checking or savings account with a bank or credit union. One major reason that people are unbanked is bank account screening credit reporting agencies (CRAs). Over 80% of banks use account screening CRA reports to decide whether to allow consumers to open a checking or savings account.
¨ In April 2018, the average FICO credit score was 704 out of a possible maximum of 850. Less than 20% of consumers had a score of less than 600. An increasing number of Americans have free access to their credit score through their bank or credit card company. Only 36% of U.S. consumers obtained their credit report in 2018. Many report that they are not aware of the process for doing so through www.annualcreditreport.com.
¨ Studies have found that annual debt notification letters to students by higher education institutions are effective tools in communicating the cost of college and financing options. In fact, 12 states have passed laws to create mandates for student debt letters. Debt letters summarize the amount that students have borrowed to date and how much they can expect to pay once they graduate.