Household’s Overindebtedness during the COVID-19 Crisis: The Role of Debt and Financial Literacy

Abstract

The COVID-19 pandemic has shown how important it is to prepare one’s own financial budget for the unexpected loss of income. In this dimension, the financial education of the society plays an invaluable role. It allows us to account for events that may adversely affect personal finances in our budget management decisions. Therefore, the aim of the article is to check whether households with a higher level of financial and debt literacy have better management skills from the perspective of a household’s budget, which in the face of a crisis reduces the risk of individuals not paying their liabilities. Thus, at the turn of June and July 2020, we conducted surveys among 1300 Polish citizens. Using the multinomial logistic regression, we show that people with a higher financial and debt literacy are less affected by overindebtedness. During the crisis, people who have a higher debt literacy are better prepared to manage credit liabilities; in this situation, financial literacy is less important. In addition, the type of credit experience turned out to be significant. Respondents who have experience with consumer loans (potentially high-margin products) are more likely to have debt repayment problems than those with mortgage loans experiences.

Debt management literacy among credit cards users

“…Similarly, individuals with work experience may identify the importance of financial literacy in general while working and subsequently manage their finances (Lopus et al, 2019). Furthermore, current studies have found that individuals with sound debt management literacy are better prepared to manage their credit liabilities monthly (Kettle, Trudel, Blanchard, & Häubl, 2016;Kurowski, 2021). Financial experience provides a paradigm to credit cards users that knowledge and exposure to the usage of credit cards early employment can build self-skills in managing finances and debt appropriately and even maintain economic viability and well-being.…”

“…It is important for credit card users to be exposed to information related to the current economic situation through accurate and reliable sources as it can help them understand and in turn be able to manage credit card debt appropriate to the current situation (Abdullah et al, 2019). However, many people have reported low financial literacy (Cwynar et al, 2019;Kurowski, 2021;Majamaa et al, 2019;Oteng, 2019). Thus forcing them to perform wrong decision when coming to economic issues because they do not understand the benefits of compounding, inflation and risk diversification of such financial complex products including mortgages, student loans and credit cards (Karakurum-Ozdemir et al, 2019;Lusardi, 2019;Mitchell & Lusardi, 2015).…”

The Impact of the Crisis Triggered by the COVID-19 Pandemic and the Actions of Regulators on the Consumer Finance Market in Poland and Other European Union Countries

“…Sentiments and expectations interact with great power in every field and can give indications of how to build efficient post-crisis socio-economic policies. Kurowski (2021) stated that the coronavirus pandemic has highlighted the importance of preparing household budgets for the unexpected loss of income. A feature of the COVID-19 crisis is that no early warning model of the financial crisis could have predicted the moment when the coronavirus pandemic would have hit the economy with consequences comparable to the 2008 global financial crisis.…”

The Impact of Creditworthiness on Financial Well-Being, Anxiety, Depression, Hopelessness, and Suicide

“…The COVID-19 pandemic crisis exposed people to overindebtedness and highlights the need for financial literacy in addressing debt. Kurowski (2021) relates, "lower debt literacy causes individuals to finance themselves at a greater cost (p. 3), whereby "the lack of financial and debt literacy of borrowers may lead to loans being taken by people who are unable to repay them" (p. 1). There are significant relationships between these sociocultural factors and financial stress and financial well-being, and psychosocial symptoms.…”