The impact of financial literacy on over-indebted Portuguese families

Over-indebtedness, which is commonly defined as the incapability of repaying debts on a structural basis, has increasingly become an issue for the Portuguese population during the years following the crisis of 2009. In 2010, one out of four households, felt at risk of over-indebtedness and, in 2015, personal insolvency represented more than two thirds of the overall number of insolvencies. Although Portugal has implemented significant reforms in order to comply with austerity measures, the accumulation of debts keeps being a fundamental need for individuals in order to smooth consumption over the cycle of life. Therefore, in order to face the rapid spread of financial products and services, there is a growing need of enabling consumers to build a more sophisticated financial knowledge. This work was carried out in collaboration with the Portuguese consumer association DECO that provides support and knowledge for over-indebted families. The main goal of the study is to examine the relationship between the level of financial literacy and the probability of being over-indebted, and the level of overindebtedness of families that seek DECO’s assistance. We designed a survey to measure the financial and economic literacy of the households. This paper is the first one to our knowledge finding that financial literacy has a significant impact on the probability of being-over-indebted. We also find that it might be relevant to implement diversified types of training based on the level of education