Financial literacy counts
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. 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.
People who grow up in community with no or few financial institutionsare 20 percent less likely to have a credit report, have 7 to 10 point lower credit scores and have 2 to 4 percent higher delinquency rates.
It takes approximately 17
years to overcome the negative effect on credit scores and 12 years to reduce
delinquency rates. Researchers also looked at data on mandated financial
literacy training in high schools across different states and found that
formative exposure to financial markets improves financial literacy and trust
in financial institutions.