Frontpage News 2015 This is where fina...

This is where financial literacy is lowest

9 March 2015

Half of the young Danes between 15-24 years find it difficult to understand personal finances. The situation is worst in Region Zealand. Combined with a high debt, young people become economically vulnerable.
In a new survey, the Danish Bankers Association has tested the Danes’ financial literacy and the results show that the young Danes between 15-24 years have great difficulties understanding and applying even the most basic financial concepts, such as computation of interest and borrowing costs.
Nationally, every other young person demonstrates poor financial literacy. The geographical differences are not large enough to be considered statistically significant and should thus be interpreted carefully. However, the test results indicate that more young people in Region Zealand have poor financial literacy.
In Region Zealand, a total of 63 per cent of the respondents between 15-24 years demonstrate poor financial literacy and are not able to provide a correct answer for at least 6 of the test questions.
In the North Denmark Region, the situation is best, though still poor, with “only” 42 per cent having poor financial literacy.
Figure 1. Young Danes with poor financial literacy by regions
Source: A&B Analyse for the Danish Bankers Association.
Note: The above figure is based on a survey of 3,704 respondents. High level of financial literacy follows OECD’s definition and is characterised by 6 or more correct responses out of 8, while 5 or less categorises the person as having a low level of financial literacy. The regional differences are not statistically significant.

More indebted young people in Copenhagen

Calculations based on longitudinal data from Statistics Denmark also show that there are regional differences in the indebtedness among young people between 18 and 29 years without owner-occupied property).*
Nationally, the debt accounts for one third of the young people’s income. Especially young people in Copenhagen, who are significantly more indebted than young people in other parts of the country, contribute to a higher average. In Copenhagen, the debt accounts for 54 per cent of the young people’s income.
The high indebtedness in Copenhagen might be due to differences in the labour market inclusion and educational composition. In Copenhagen, many young people are enrolled in education and have a relatively low income combined with a heavy debt, e.g. in the form of student loans.** Moreover, a large number of young people in Copenhagen live in a shared ownership property and thus have a relatively higher level of debt.***
When disregarding the high indebtedness in Copenhagen, the debt is highest in Region Zealand - accounting for 31 per cent of the young people’s income.
The young people in West and South Jutland are the least indebted – with debt obligations only representing 22-24 per cent of the income.
Figure 2. Debt ratio among young people by regions
Source: Own calculations based on longitudinal data from Statistics Denmark.
Note: The debt ratio among young people between 18 and 29 years as the proportion of bank debt to personal income. Bank debt covers debt to banks, pension funds, insurance and finance companies and credit card schemes.

Debt and ignorance is a bad combination

The studies show that the financial literacy is poor in the parts of the country where the young people’s indebtedness is also high. 
According to Louise Mogensen, Deputy Chief Executive at the Danish Bankers Association, this relationship can be problematic and make the individual more economically vulnerable:
“A large debt in itself is not necessarily a sign of careless or inappropriate behaviour, if the individual meets his/her loan commitments. For example, it can be rational to obtain a student loan in anticipation of a good and stable income later in life,” says Deputy Chief Executive, Louise Mogensen, and continues:
“But, if the young person does not have the right financial skills and if the debt reflects a high level of consumer spending and expensive habits with high interest expenses as a consequence, it can put the young person in a very vulnerable position where even small fluctuations in income, interest rates and payment requirements may have serious consequences for his/her personal finances.”
*Only young people without owner-occupied property are considered, as the focus is on loans for consumptions purposes, including e.g. easy accessible consumer loans or similar.
**A heavy student loan debt is not necessarily problematic, as the students face a relatively higher income later in life.
*** It is not possible to separate the young people with shared ownership property in the longitudinal data, which is why the figures for non-owner-occupied property include all young people who either live at home, for rent or in shared ownership property.
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