Financial literacy is undoubtedly important, and various campaigns over the years have urged schools and education providers to do more to provide young people with basic financial management skills. New research from the University of Exeter goes a step further, and argues that a basic level of provable financial competence should be required before people are allowed to borrow money for the first time.
This could protect new borrowers from falling into long-term debt, they suggest. There is also a greater requirement upon lenders to take into account factors such as age, experience, and personality traits, which the researchers believe could be spotted via psychometric testing.
“I argue that—similar to obtaining a driving license—people should have to demonstrate their competence before taking out debts that could have long-term negative consequences,” the author says. “Some people are particularly susceptible to debt problems. This includes those of an impulsive disposition, but it particularly applies to young people—and debts contracted early in life can have long-term ill effects.”
Protecting the vulnerable
The researcher believes, therefore, that more needs to be done to protect people who have yet to develop sufficient financial literacy to protect themselves.
“Although this would involve a restriction of the financial freedom of people who are legally adults, the evidence suggests that access to credit should be controlled more carefully,” they say.
They argue that these kinds of considerations are already required of financial advisors, so while lenders may grumble about such an imposition, it is already in place in some sections of the industry. With debt also heavily influenced by economic inequality, there are also political motivations for change.
The situation and precarity of people’s financial health will undoubtedly have been worsened by the Covid-19 pandemic, with these challenges likely to place an even greater importance on both tackling financial inequality and financial literacy.
“Many people are shockingly bad at assessing credit deals,” the researcher explains. “What seems to be needed is fluency in seeing, without effortful calculation, what is or is not a good deal when borrowing money.”
Any education should cover areas such as awareness of one’s credit position and the importance of seeking registered financial support before embarking on lending for the first time.
“If all these recommendations were adopted overnight, the problems of debt in society would not go away,” the researcher concludes. “Credit enhances consumer choice and is a necessary function in a modern economy, and so long is credit is available, some people will get into difficulties with debt. But, as is the case with poverty itself, neither the extent nor the level of debt is fixed.”
