Do you remember the first credit you applied for?
Chances are you learned a lot in the process. In the top economies of the world, we’re inundated with credit offers the moment we become adults. Unfortunately, schools and parents around the world are failing to provide financial education to young adults. And it’s even worse in developing countries, where both credit access and education are limited. Regardless of the location, credit has a profound impact on the quality of life and economy.
Financial Literacy Rates
The UK has one of the highest financial literacy rates in the world, yet 58% of students aged 15–18 claim they did not receive any financial education. This is despite financial literacy being a mandatory part of the curriculum since 2013, according to the London Institute of Banking and Finance.
The reality is, it’s not happening in schools. Financial education happens when you apply for your first credit.
The key is to start early.
Those who get an early start on financial literacy also have improved credit scores. A report from the New York Federal Reserve shows there are two reasons for this:
- Credit history is a major factor in developing a strong credit score
- Financial literacy decreases the chances of delinquency, collections, and non-student debt
Without financial education, credit can lead to a massive amount of debt. But, for the financially literally, credit can be used for good.
How Credit Acts As Financial Education
Credit teaches us much more than meets the eye.
It teaches us how to save money. For example a mortgage payment is essentially a forced savings plan, giving homeowners the discipline to save.
Credit teaches us trust and responsibility. Lending someone thousands of dollars or co-signing a loan requires a tremendous amount of trust.
And, it teaches us about the risks and rewards of compound interest.
Chart From: Gflec.org
Impact of Credit On Life
Access to credit has an explicit effect on economies, as measured by Gross Domestic Product (GDP). The World Bank estimates if banks in the bottom 25 developing countries had an equal investment rate to the top 25 they would improve GDP as much as 3%. With increased capital investment, businesses can grow.
And it’s not just businesses. A survey released from the World Bank Development Group shows, “32 percent of adults in Brazil have a credit card, yet 40 percent of them are financially literate and only half correctly answer the compound interest question.”
Credit literally affects how you live. A home is often the biggest asset that people have. Even for those who rent, landlords check credit scores.
Credit can enable life changing loans. Buying a house, getting an education, growing a business, moving to a new country, or buying a car. Even those making small purchases rely on credit. Utility companies commonly check credit scores for internet, cable, and even cellular service.
Even your job depends on credit. For many employers, it’s standard to check credit scores during the hiring process. Credit scores are a metric for trust and responsibility — exactly what an employer wants to see from their new employee.
Credit in The Developing World
Now we know the importance of credit and the effect that it can have on people’s lives, how many people actually have access to credit, and who needs it the most? In the Western world, more than half of citizens have credit cards. In developing countries only 7% of citizens have a credit card.
Can access to credit close the gender equality gap? The gap is significant — 46% of men have a bank account versus only 37% of women according to the Economist. To be fair, the income equality gap may in turn cause this. What if the opposite is true? We must consider, if women had fair access to credit, this could actually help close the income inequality gap. Credit empowers women around the world to start businesses, take charge of finances, and build home equity.
Financial education also helps ward off the risky and expensive pitfalls of accessing informal credit from savings clubs like Tandas, loan sharks, and non-institutional lenders.
The reality is most of the developing world doesn’t have access to credit, and this is why the cycle of poverty continues. The rich have mastered the art of leveraging credit while the poor have not.
Businesses Lack Access To Credit
Small to medium enterprises (SMEs) lack access to credit in developing countries. Research from the world bank shows that 50% of SMEs lack access to credit, and even worse 70% of SME lack access to credit.
Yet, small businesses are credited with creating more than half of jobs worldwide.
Thus it’s extremely important that we educate small businesses and consumers on the importance of credit. That is why Fundary’s goal is to use micro credit to educate customers and build a credit history that enables them to take life changing loans.
