The Checkout

Is Ignorance Bliss?

Nancy Trejos

Here's an interesting study I came across that examines how our attitudes can affect our finances. Published in the Journal of Consumer Affairs this summer, the study suggests that many of us tend to overestimate our creditworthiness and that when we do, we take less care of our finances.

Author Vanessa Gail Perry, assistant professor at the George Washington University School of Business, examined the Freddie Mac Consumer Credit Survey of about 23,000 people. She found that 32 percent of respondents overestimated their credit ratings, or credit scores, which lenders use to determine how risky a consumer is. Only 4 percent underestimated their credit ratings.

Those who overestimated their credit ratings were less knowledgeable about their finances and were more likely to have had difficult experiences in the past. They were less likely to budget, save, or invest regularly. And they tended to have lower incomes, less formal education and didn't own their homes.

Perry also pointed out that they were more likely to be African American or Hispanic and female, possibly because minorities have less experience in financial markets, she said.
Why is this so important?

"This tendency toward overestimation may lead consumers to be less cautious in their financial decision making," Perry said.

Furthermore, she said "this overestimation bias is more likely to affect groups of particular concern to policy makers, including less financially sophisticated, lower-income, African American, and Hispanic consumers."

She concludes that policy makers and consumer advocates should encourage people to take advantage of the Fair and Accurate Credit Transactions act requirements by obtaining a copy of their credit reports and keeping track of changes in their credit scores.

This comes at a time when lawmakers and consumer advocates are talking more about the need for improved financial literacy, thanks to the subprime mortgage meltdown. Perhaps overconfidence played a role in consumers taking out mortgages they really could not afford?

In any case, one thing seems clear, and that is this: Ignorance is not bliss when it comes to your finances.


By Nancy Trejos |  June 5, 2008; 7:08 AM ET Nancy Trejos
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Comments

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This would be a good place to mention the recent TransUnion settlement that will give free credit scores to pretty much everyone who has used credit over the last 20 years:
http://www.finance-weblog.com/50226711/transunion_settlement_means_free_credit_scores_for_everyone.php

Posted by: Justin McHenry | June 6, 2008 10:57 AM

Tip #1: Understand where credit scores come from.

If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. Without this information, you won't be able to very effectively improve your score because you won't understand how the things you do in daily life affect your score.

If you don't understand how your credit score works, you will also be at the mercy of any company that tries to tell you how you can improve your score - on their terms and at their price.
In general, your credit score is a number that lets lenders know how much of a credit risk you are.
The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.

In general, the higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates. Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there.

Posted by: alberto | June 13, 2008 9:43 PM

Tip #1: Understand where credit scores come from.

If you are going to improve your credit score, then logic has it that you must understand what your credit score is and how it works. Without this information, you won't be able to very effectively improve your score because you won't understand how the things you do in daily life affect your score.

If you don't understand how your credit score works, you will also be at the mercy of any company that tries to tell you how you can improve your score - on their terms and at their price.
In general, your credit score is a number that lets lenders know how much of a credit risk you are.
The credit score is a number, usually between 300 and 850, that lets lenders know how well you are paying off your debts and how much of a credit risk you are.

In general, the higher your credit score, the better credit risk you make and the more likely you are to be given credit at great rates. Scores in the low 600s and below will often give you trouble in finding credit, while scores of 720 and above will generally give you the best interest rates out there.
http://www.101tips.net78.net

Posted by: alberto | June 13, 2008 9:44 PM

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