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Every other young person lacks sufficient financial literacy

2 March 2015

​Study: Every other young person between 15-24 years and every third of all Danes over the age of 15 years lack basic financial literacy skills. 

There is an urgent need to enhance financial literacy among young people. This is evident from the Danish Bankers Association’s new study, which has tested the Danish financial literacy in an extensive survey.

The results are particularly bad for the young people between 15-24 years, where a total of 52 per cent lack basic financial literacy skills. And it can be expensive for the young people and for our society.
 
“It can make it unnecessary costly for the young people, and make it very difficult for the individual to be able to finance his or her dreams”, says Deputy Chief Executive at the Danish Bankers Association, Louise Mogensen.
 
 
Figure 1. Share with high level of financial literacy by age group
Source: A&B Analyse for the Danish Bankers Association.
 
 

Especially interest rates cause difficulties

The study shows that particularly the understanding of interest calculation and comparison of loan offers bring difficulties among young people. For example, only 45 per cent of all young people are able to calculate the correct costs of a loan.
 
"Financial literacy and basic mathematical skills are essential in order to make informed and active choices about personal finances. The results indicate that the young people find it difficult to understand the mechanisms behind money, consumption and the consequences of the choices they make,” says Louise Mogensen.
 
 
Figure 2. Distribution of answers to questions about mathematical skills among young people
Source: A&B Analyse for the Danish Bankers Association.
Note: To cover mathematical skills, the young people were asked to identify the cheapest loan offer among three possible options. The above figure shows the distribution of the responses. The correct answer is option A, which is the cheapest loan offer. Option B is the second cheapest and option C is the most expensive loan offer.
 
 

Negative debt behaviour starts early in life

The negative debt behaviour is established early on in life. The latest figures from the information service Experian show that approx. 50,000 young people between 21-30 years are registered as bad payers in RKI (Danish credit registration system).
 
“In adolescent years, important economic decisions are made, such as creating savings or taking on debt, and the low level of financial literacy is therefore particularly problematic. It emphasises the need for an early effort to enhance the financial literacy,” says Louise Mogensen and continues:
 
"The Danish Bankers Association wants to be a part of this effort.”
 
 
Figure 3: Share of people registered in RKI registers
 

 
Source: Experian.
 
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Questionnaire design

The study is designed on the basis of a sample covering 3,704 respondents, and seeks to uncover the financial literacy based on eight questions related to basic financial conditions. The questions are chosen to cover a range of key financial topics, while ensuring variation in the level of difficulty. A similar format has been employed by i.a. OECD (2012)*, which measures the financial literacy among member states.
 
Based on the questions, a financial literacy scale is established. The scale corresponds to the number of correct answers, where 5 or fewer correct answers is categorised as a low level of financial literacy, and 6 or more as a high level of financial literacy. The same definition is used in OECD (2012).
 
Furthermore, the study includes questions related to underlying factors that are likely to have an impact on the financial literacy as well as factors related to the respondents’ financial behaviour.
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*Atkinson, A. and F. Messy (2012), “Measuring Financial Literacy: Results of the OECD / International Network on Financial Education (INFE) Pilot Study”, OECD Working Papers on Finance, Insurance and Private Pensions, No. 15, OECD Publishing.
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