Financial Education is Lacking in the United States
Every consumer needs to know about CD rates and how certificates of deposits work. Savings account rates and how savings accounts work. Mortgage rates and how to obtain a mortgage loan. The right decisions can bring financial security; the wrong ones can cause enormous harm, as many of those who chose volatile adjustable mortgages today in recent years can attest to the problems that arise.
There is broad agreement that financial illiteracy is amajor problemin theUnited States, one that has serious consequences both for consumers and for the economy.The troubles gripping the United States is the recession and lack of financial knowledge. Many more people have never heard of a CD calculator.Record low savings rates, CD rates, rising bankruptcies andmortgage delinquencies, and high levels of credit card debt all point to a need for bettermoney-management skills.
That is changing, as the Road Show participants pointed out.These groups have themost to gain fromusing the financial tools that banks have to offer, yet a wide variety of factors—cultural differences, language barriers and institutional distrust among them—have discouraged consumers fromdoing so.These include remittances, fee-based check cashing, and “second chance” checking accounts for those who have had accounts but lost themthroughmisunderstanding ormisuse.
The problemcuts across social, age and economic lines, but it ismost acute among consumers with little or no previous exposure to the banking system, especially new immigrants andmembers of minority communities.
MostAmericanswould be hard-pressed to explain the reasons for the economy’s sharp decline or to define such contributing factors as credit default swaps and collateralized debt obligations.Simply put, far toomany Americans don’t understand how to use their ownmoney, a lack of knowledge that deprives themof the opportunities for security and growth that it can provide.
Those without checking or savings accounts often are forced to do business with check-cashing firms or payday lenders, whose loansmay carry an average annual percentage rate of 470 percent.Many of these consumers find bank products and fees confusing and branch locations and hours inconvenient.The expansion of financialmarkets and the banking industry has created a wave of new and often complicated products that require consumers tomake more choices.The need for such knowledge has exploded.
They save too little and spend toomuch, amass large credit card balances and buy houses they cannot afford.A significant obstacle to improving financial skills is the large number of “unbanked” consumers— the estimated 10-20million people who have no relationship with a bank.Many don’t understand how deposit insurance works.Above all, consumersmust feel confident that the financial systemworks.
Banks must find ways to build community trust, and regulatorsmust find ways to support change while continuing their vital oversight roles.Not enough know how to create a household budget or choose the right bank account.The nation’s economic health depends on consumers knowing how tomake, save and investmoney.
If not just for themselves and their families, but for the good of their communities.Yet there ismuchmore to do.The banking industry, working with community organizations and regulators, is targeting those problems by opening branches in underserved areas and offering amix of services and products geared toward the unbanked.
No one would expect the average citizen to understand such financial complexity, but the recession has thrown light on amore fundamental lack of knowledge.Moreover, such consumers cannot harness the power of regular saving to build assets for the future.
The need for consumer education has grown with the spread of complex financial products, yet until recent years not enough has been done to help consumers, especially young people,make informed decisions about theirmoney.Too few Americans understand even basic financialmatters, a shortcoming that has exposed themto potential disaster.
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