PhotoWhen the financial crisis of 2008 hit, many consumers found themselves over-extended on their credit cards. Since then, a painful deleveraging process has been taking place.

Two economists at the University of Nebraska – Sam Allgood and William Walstad – wanted to know how a consumer's knowledge about credit cards affected their credit situation. They found that it's not just what you know, but what you think you know, that can make a difference.

For their study, they surveyed roughly 27,500 people nationwide and measured five credit-card behaviors: Paying credit card bills in full; carrying a credit card balance; paying just the minimum payment; paying late fees; and exceeding the card’s limit.

In all cases, respondents who believed they knew and understood credit cards and finances had better credit-card behavior than those who saw their knowledge as low.

Having knowledge and knowing it

For example, the study found, Americans who are actually smart about finance and know it are 15.5 percent more likely to pay their credit card bills in full compared with people with the same level of financial knowledge, but who perceive themselves as not having a high financial expertise.

The low self-perceivers also are 15 percent more likely to carry a monthly balance, 12 percent more likely to merely pay the minimum payment each month, 11 percent more likely to be charged a late fee and six percent more likely to exceed their card’s spending limits.

“Before beginning, we hypothesized two possibilities: people would be over-confident and this would lead them to make bad decisions or that people need confidence to act on the knowledge they possess,” Allgood said. “Our study suggests that it is the latter.

Lack of confidence?

The economists say you must have actual knowledge to make good personal financial decisions, but people don't seem to be willing to act on that knowledge unless they also perceive themselves to be knowledgeable.

The study found that 41 percent of consumers surveyed had both low actual and self-perceived financial knowledge. Twenty-five percent had low actual financial knowledge but thought their knowledge was high; 16 percent had high actual knowledge but perceived their understanding as low; and 18 percent had high actual knowledge and perceived themselves the same way.

Forty-two percent of respondents said they paid their credit card balances in full each month, while 58 percent carried a balance forward.

According to the Federal Reserve, the average consumer has more than three credit cards and carries a balance of more than $15,000.  

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