Academy of Financial Services
Previous research using the Survey of Consumer Finances (SCF) has found a positive effect of education on the likelihood of having financial obligations ratio over 40%, but until 2016, SCF datasets did not have direct measures of financial literacy. The 2016 SCF dataset has three financial literacy questions, allowing for the use of a financial literacy score as an independent variable. The purpose of this study was to analyze how financial literacy affected the likelihood of U.S. renter and homeowner households having a financial obligations ratio over 40%. Based on the logistic regression results, no evidence of relationship is supported between financial literacy scores and households’ having a heavy financial obligations burden. The lack of an effect of financial literacy on having a heavy financial obligations burden suggests that having a financial obligations burden over 40% of income is not necessarily a mistake, for both homeowners or for renters.
Author(s): Congrong Ouyang, Sherman D. Hanna