This paper by Annamaria Lusardi and Peter Tufano examines the relationship between debt literacy, financial experiences, and overindebtedness among Americans. The authors measure debt literacy through questions testing knowledge of fundamental concepts related to debt and self-assessed financial knowledge. They also collect data on financial experiences, including traditional borrowing, alternative borrowing, and investing activities. Overindebtedness is measured as a self-reported measure. Key findings include: - Low debt literacy: Only about one-third of the population understands interest compounding or the workings of credit cards. - Strong relationship between debt literacy and financial experiences: Individuals with lower debt literacy tend to engage in high-cost borrowing and incur higher fees. - Impact on credit card charges and fees: As much as one-third of charges and fees paid by less knowledgeable individuals can be attributed to ignorance. - Link to overindebtedness: Those with lower debt literacy tend to judge their debt as excessive or report uncertainty about their debt position. The authors contribute to the literature by: - Measuring debt literacy specifically related to debt and overindebtedness. - Proposing a method to consider a wide range of financial experiences. - Measuring indebtedness through self-assessment. The study finds that debt illiteracy is widespread, particularly among women, the elderly, minorities, and those who are divorced or separated. The authors conclude that lack of financial skills is a significant concern, especially in an economy where consumers frequently borrow and save using debt-like instruments.This paper by Annamaria Lusardi and Peter Tufano examines the relationship between debt literacy, financial experiences, and overindebtedness among Americans. The authors measure debt literacy through questions testing knowledge of fundamental concepts related to debt and self-assessed financial knowledge. They also collect data on financial experiences, including traditional borrowing, alternative borrowing, and investing activities. Overindebtedness is measured as a self-reported measure. Key findings include: - Low debt literacy: Only about one-third of the population understands interest compounding or the workings of credit cards. - Strong relationship between debt literacy and financial experiences: Individuals with lower debt literacy tend to engage in high-cost borrowing and incur higher fees. - Impact on credit card charges and fees: As much as one-third of charges and fees paid by less knowledgeable individuals can be attributed to ignorance. - Link to overindebtedness: Those with lower debt literacy tend to judge their debt as excessive or report uncertainty about their debt position. The authors contribute to the literature by: - Measuring debt literacy specifically related to debt and overindebtedness. - Proposing a method to consider a wide range of financial experiences. - Measuring indebtedness through self-assessment. The study finds that debt illiteracy is widespread, particularly among women, the elderly, minorities, and those who are divorced or separated. The authors conclude that lack of financial skills is a significant concern, especially in an economy where consumers frequently borrow and save using debt-like instruments.