Warning: Flunking this quiz may endanger your financial health
For some of us, compound interest and the time value of money are pretty basic concepts. But for a majority of Americans, according to a new study by professors from Dartmouth and Harvard, they’re about as foreign as Greek or Mandarin.
Furthermore, Annamaria Lusardi and Peter Tufano say, the debt-illiterate pay a high price for their ignorance. People who don’t understand debt pay 46 percent more in credit-card fees, for example. Even after controlling for income, wealth and other factors, the researchers estimate that the credit-card industry extracts an extra $3.5 billion a year from people who don’t understand basic credit concepts.
So, are you debt literate? Our Debt IQ Quiz takes the researchers’ three questions and adds seven more about various kinds of consumer debt. If you struggle, take comfort in the fact that you have a lot of company: When Lusardi and Tufano asked the first question in our quiz, only 36 percent of respondents got it right. No. 3 was a real toughie — only 7 percent of their sample knew the right answer. When folks were asked to assess their own debt-literacy level, though, most rated themselves above average.
How did you do on our quiz? Use the comments section to share your triumph, your frustration or your own example of why debt literacy is important.
(1 votes, average: 4 out of 5)
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
The most confusing thing for consumers in the actual interest rate and the Annual Percentage Rate aka the APR that appear on loan documents. As a lender it a difficult thing to explain let alone understand.
I missed the two about what affects my credit score. The system for calculating credit scores is so whacky that the best way to understand it is to assume that anything about you that has nothing to do with your willingness and ability to pay debts will probably be counted. No doubt the system was designed by the Ivy League business school classmates of the financial geniuses at AIG, Lehmann Brothers et al.
But it hardly makes a difference if, like me, you recognize the high APR that you are paying on credit card debt and always pay your credit card bills monthly. (By the way — to illustrate my point about the whackiness of the credit rating system — I have heard that even doing that will lower your credit score. The rating agencies prefer that you pay every month, but not the entire amount of your bill.)
I agree, Ted44. I had a heck of time obtaining a mortgage for my first home. I was told that I was considered a “bad credit risk” because I had never carried a large debt.
I had a work history since I was 16.
I had carried a credit card for over 5 years (Silly me, I made the mistake of paying it in full each month).
Because I had a full-ride scholarship, I had made it through college with no student loans.
I had saved up and paid cash for my late model car.
I actually asked, “So, because I have been fiscally responsibl for the last 10 years, I’m considered a financial risk?”
The response was, “Yes, if you carried more debt you would be considered more credit worthy.”
Insane.
I got 90% right. I think the most important point is that you can pay the minimum on a credit card forever. The amount you are paying does not even cover each months new interest.
I only got 80% on the Geography quiz. but, I am not planning on traveling to the places I couldn’t find on the map.
In response to dms (and I’ll refrain from entirely saying what those initials could stand for except that the dm part could be “dumb”):
Sure, a person can pay only the minimum balance on their credit card forever. In fact, the issuer of the card will love you for that because they are charging you an exorbitant rate of interest on the balance, and you can’t even legally deduct that from your taxable income.
If you must have debt, it should be in the form of a home mortgage that is at a low rate of interest, and the interest is deductible from your taxable income.
I got a 7. I missed the percentage questions because I didn’t have a pen or pencil to do some quick math with, but that doesn’t bother me because I would never in a million years carry a balance on a credit card OR take a loan that paid back 1200 bucks for a $1000 purchase. I only buy what I can afford.
The only debt I have is my house payment. No car payments, no credit cards, no student loans, nothing. If you spend more than you have then you are an idiot (sorry, but there isn’t a better way to say that).
For those who really care $3,000 debt at 12% APR with a $30 monthly payment will be paid off in 26 years and 3 months not never. Total payments will have been $9,450.
Daver, you make a good mathematical point. I believe that if the interest rate were really 1% a month (which the “never” answer depends on) the true APR would be slightly higher than 12%, because of the time value of money. (The language for that question, which came from the research study cited above, does say 12% APR.) At a true 12% APR, a few cents of the first $30 payment would actually go toward principal, and the debt would very slowly be paid down. Interestingly, I plugged the problem into several Web calculators and found some that came up with the “never” answer, some that gave me daver’s answer, and some that said it would take 50 years. I think the latter were taking the minimum payment as a percentage of the balance, and assuming that the payment would decline as the debt declined.