Financial Educators Council

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Iowa State University study: Early exposure to banking may influence life-long financial health

The Financial Educators Council defined financial literacy:

Definitions of Financial Literacy
“Financial literacy is a combination of financial knowledge, skills, attitudes and behaviors necessary to make sound financial decisions, based on personal circumstances, to improve financial wellbeing” (Australian Securities and Investments Commission). http://www.financialliteracy.gov.au
“Personal finance describes the principles and methods that individuals use to acquire and manage income and assets. Financial literacy is the ability to use knowledge and skills to manage one’s financial resources effectively for lifetime financial security. Financial literacy is not an absolute state; it is a continuum of abilities that is subject to variables such as age, family, culture, and residence. Financial literacy refers to an evolving state of competency that enables each individual to respond effectively to ever-changing personal and economic circumstances. The combination of knowledge, skills, attitudes and ultimately behaviors that translate into sound financial decisions and appropriate use of financial services.” – The Center for Financial Inclusion
“A level of financial knowledge and skills that enables individuals to identify the fundamental financial information required to make their conscious and prudent decisions; and after the acquisition of identified data allows them to interpret said data, make decisions on their basis, all the while assessing potential future financial and other consequences of their decisions.” (National Bank of Hungary, 2008).

“The ability to read, analyze, manage, and communicate about the personal financial conditions that affect material well-being.” (National Endowment for Financial Education). https://www.nefe.org/
https://www.financialeducatorscouncil.org/what-is-financial-literacy/

Lack of financial literacy skills are one aspect of poverty.

Nancy L. Anderson wrote in the Forbes article, How Financial Literacy Can Lift Women Out Of Poverty:

Without financial literacy, you can’t lift yourself from poverty.
In order to have financial security and eventual financial independence, knowledge of personal finance basics—managing savings, banking and investment accounts—is mandatory.
Financial literacy can provide so much more, though. Think about this: When you are money savvy, no one can try to control your life by controlling your finances.
When your partner controls the money and you don’t have financial knowledge or access to accounts at all except for the “allowance” you are given, how can you walk away if you need to?
Not easily…. https://www.forbes.com/sites/nancyanderson/2019/05/11/how-financial-literacy-can-lift-women-out-of-poverty/#5d3417d37a49

A University of Iowa study points to the need for all communities to have access to financial institutions.

Science Daily reported in Early exposure to banking may influence life-long financial health:

Growing up in a community with or without banks or financial institutions has a long-term effect on how you build and manage credit, according to a new Iowa State University study.
Early exposure to local banking increases financial literacy and trust, said James Brown, Kingland MBA professor and chair of finance in ISU’s Ivy College of Business. The research shows individuals who grow up in what are essentially “financial deserts” are slow to apply for credit and as adults have lower credit scores and more delinquent accounts. The research is published in the Journal of Financial Economics.
“The fact that this has a lingering impact is important, because people don’t have a lot of control over where they grow up,” Brown said. “I remember growing up right across the street from a bank and going with my dad to open my first account. But a lot of people grow up in an environment where banks are not visible and it’s not as easy to connect to a financial institution at a young age.”
Brown and colleagues J. Anthony Cookson, University of Colorado Boulder; and Rawley Z. Heimer, Boston College, compared credit history data for individuals on Native American reservations with tribal courts to individuals on reservations under the jurisdiction of state courts. Brown says the differences in court enforcement — the result of a 1953 federal law — had an unintended effect on local financial markets.
As a result, tribal court reservations had approximately 20 percent fewer bank branches per capita by the 2000s. The reservations provide an environment for researchers to look specifically at the effects of financial exposure. Brown says the findings extend broadly to any community with no or few financial institutions, and illustrate the effect on borrowers who grow up without finance:
• They are 20 percent less likely to have a credit report
• They have 7 to 10 point lower credit scores
• They have 2 to 4 percent higher delinquency rates
• The effect on their credit scores is similar to the effect of reducing annual income by $6,000
Moving to a community with stronger financial markets does partially offset these effects, researchers found. However, it still takes approximately 17 years to overcome the negative effect on credit scores and 12 years to reduce delinquency rates…. https://www.sciencedaily.com/releases/2019/05/190516114621.htm

Citation:

Early exposure to banking may influence life-long financial health
Date: May 16, 2019
Source: Iowa State University
Summary:
Growing up in a community with or without banks has a long-term effect on how you build and manage credit, according to a new study. The research shows individuals who grow up in what are essentially ‘financial deserts’ are slow to apply for credit and as adults have lower credit scores and more delinquent accounts.

Journal Reference:
James R. Brown, J. Anthony Cookson, Rawley Z. Heimer. Growing up without finance. Journal of Financial Economics, 2019; DOI: 10.1016/j.jfineco.2019.05.006

Here is the press release from Iowa State University:

NEWS RELEASE 16-MAY-2019
Early exposure to banking influences life-long financial health
IOWA STATE UNIVERSITY
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AMES, Iowa – Growing up in a community with or without banks or financial institutions has a long-term effect on how you build and manage credit, according to a new Iowa State University study.
Early exposure to local banking increases financial literacy and trust, said James Brown, Kingland MBA professor and chair of finance in ISU’s Ivy College of Business. The research shows individuals who grow up in what are essentially “financial deserts” are slow to apply for credit and as adults have lower credit scores and more delinquent accounts. The research is published in the Journal of Financial Economics.
“The fact that this has a lingering impact is important, because people don’t have a lot of control over where they grow up,” Brown said. “I remember growing up right across the street from a bank and going with my dad to open my first account. But a lot of people grow up in an environment where banks are not visible and it’s not as easy to connect to a financial institution at a young age.”
Brown and colleagues J. Anthony Cookson, University of Colorado Boulder; and Rawley Z. Heimer, Boston College, compared credit history data for individuals on Native American reservations with tribal courts to individuals on reservations under the jurisdiction of state courts. Brown says the differences in court enforcement – the result of a 1953 federal law – had an unintended effect on local financial markets.
As a result, tribal court reservations had approximately 20 percent fewer bank branches per capita by the 2000s. The reservations provide an environment for researchers to look specifically at the effects of financial exposure. Brown says the findings extend broadly to any community with no or few financial institutions, and illustrate the effect on borrowers who grow up without finance:
• They are 20 percent less likely to have a credit report
• They have 7 to 10 point lower credit scores
• They have 2 to 4 percent higher delinquency rates
• The effect on their credit scores is similar to the effect of reducing annual income by $6,000
Moving to a community with stronger financial markets does partially offset these effects, researchers found. However, it still takes approximately 17 years to overcome the negative effect on credit scores and 12 years to reduce delinquency rates.
Financial literacy, trust
To understand why early exposure affects consumer credit behavior, researchers also looked at data on mandated financial literacy training in high schools across different states. Brown says this helped them determine that formative exposure to financial markets improves financial literacy and trust in financial institutions.
“Exposure and trust go together. If you grow up in an environment with more banks, you’re more inclined to trust banks and the financial system,” Brown said. “If you grow up in a financial services desert, you’re much less likely to trust financial institutions, which may be one reason you don’t engage or you don’t pay back your credit card bills with the same frequency.”
The researchers also surveyed Native Americans about their experiences with banks, attitudes about financial matters and skills for solving basic consumer financial problems. Survey respondents who grew up near a bank had better financial literacy and more trust in banks, Brown said. Researchers controlled for income and education.
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Talon Lister wrote in Financial Literacy Programs Could Save Families From Poverty:

Why We Need Financial Literacy Programs for the Poor
All things considered, I think my family would be in a better financial position had my mother received financial education in high school. That knowledge could have helped drive the monetary decisions that she made — as it should do.
While the role of financial literacy in class mobility is contested, there are financial professionals who agree with me.
“Many lower- and middle-class individuals do not understand the massive negative ramifications of payday loans, credit card debt, and defaulting on obligations,” says investment adviser Gabriel Pincus. “A course in financial literacy offered for free by communities could potentially deliver amazing benefits to their constituents.”
More education and knowledge about your situation is always a useful tool to counteract the forces working against you, and in this case, it could save you from poverty…. https://centsai.com/must-reads/insufficient-funds/financial-literacy-programs-save-from-poverty/

See, Annual Poverty Project Focuses on Financial Literacy https://uanews.arizona.edu/story/annual-poverty-project-focuses-financial-literacy

Resources:

What is Financial Literacy – Your Life Your Money | PBS http://www.pbs.org/your-life-your-money/more/what_is_financial_literacy.php

What Is Financial Literacy? https://www.edutopia.org/blog/what-is-financial-literacy-lennette-coleman

Addressing Poverty Through Digital And Financial Literacy https://www.forbes.com/sites/causeintegration/2016/01/07/addressing-poverty-through-digital-and-financial-literacy/#21589e4210b3

Financial Literacy: School Poverty Indicator https://nces.ed.gov/surveys/pisa/pisa2015/pisa2015highlights_11e.asp

Blogs by Dr. Wilda:

Tags: Banking, Early exposure to banking may influence life-long financial health, Financial Educators Council, Financial Literacy, Financial Literacy and Poverty, Financial Literacy Programs Could Save Families From Poverty, Growing up without finance., Iowa State University, Poverty