Financial illiteracy cost typical American nearly $1,200 last year

Financial literacy is independent of banking opportunity. In other words, just because someone has a savings or checking account doesn't mean he or she has a solid grip on what it takes to be savvy and measured when it comes to budgeting and expenses.

Case in point: Consider how much money Americans may have saved last year had they been a bit more adept in their financial prowess.

The average consumer spent nearly $1,200 in 2017 due to personal financial mismanagement, according to a recent poll conducted by the National Financial Educators Council. For nearly 18 percent of the 1,500 respondents in the survey, the average amount lost to financial illiteracy was in excess of $2,500. Forty percent said their monetary losses were closer to $500.

This means that of the 240 million adults in the U.S. - out of an overall population totaling 323 million, according to the most recent Census - $280 billion last year was unnecessarily frittered away due to insufficient financial comprehension.

Vince Shorb, NFEC CEO, stressed that the amount lost speaks not to Americans' limited understanding necessarily, but to how complex finances can be for families.

"Americans today have to negotiate a very complex financial and economic landscape, and given recent changes to the tax code and new digital currency options, that complexity is only going to increase," Shorb explained. "Improving people's ability to make informed financial decisions and increasing access to financial education programs is more important now than ever before."

Helping customers understand credit is key
One of the ways lenders and business owners can go about this is by helping consumers understand how credit scores are evaluated. An individual's credit standing is dependent on a variety of criteria, one of which is how promptly debts are paid. This is something that most Americans (87 percent) understand, as revealed in a survey conducted by Equifax last year. They were also largely aware (42 percent) of what could adversely impact their credit and that these indications could remain on their credit report for several years. For instance, if someone is foreclosed upon, it usually takes around seven years before this information is removed from their credit. This was something that most respondents attested to knowing. 

Dann Adams, president of global consumer solutions at Equifax, stressed that getting back to the fundamentals is imperative for business owners as well as the customers to whom they provide services.

"Without a basic understanding of credit and your own behaviors, it can become challenging to do some of the basic fundamentals such as save for retirement, establish an emergency savings account, or move beyond living paycheck to paycheck," Adams warned.

He added that one of the positive takeaways from Equifax's findings - as well as those of other polls - is consumers' realization that paying bills on time has a practical purpose to it. Not only does it establish that they are reliable, but it can also improve their credit scores notably.

Alternative credit data goes beyond the standard credit report.

Alternative credit data provides clearer picture
Just as the factors that go into an individual's credit score aren't all weighted the same, a similar standard applies to bill payments: They aren't all reported to the nation's main credit bureaus. This is part of the reason why alternative credit data is becoming a more common source of information for lenders and businesses - because it provides a clearer, fuller depiction of how their current or potential customers are doing with their expenses as a whole.

Types of alternative credit data include cable bills, phone bills and rent payments, both in terms of how timely the payments are and for how long someone has rented. Rent length is a valuable metric because it can help establish a potential of current customer's long-term dependability.

At Microbilt, our goal is to establish not how to lend more, but how to lend smart. We can help make this possible through our risk management solutions. Contact us to learn more.