More than half of the 1500 respondents said they felt confident about their financial future. But, alarmingly, less than half achieved a passing score on ME’s basic financial literacy quiz.
Nic Emery, Head of Deposits and Transactional Banking at ME Bank, says the findings indicate that many people are making ill-informed banking decisions and potentially losing thousands. “People don’t know nearly as much as they think,” said Emery.
“Having been in financial services for 20 years, that didn’t surprise me. But the extent to which it’s true was bigger than I expected. The fact that 60 per cent of people didn’t even get half the questions right in the literacy quiz is pretty significant.”
• 80% think that Lenders Mortgage Insurance (LMI) covers the borrower if they were unable to keep up repayments.
• 74% don’t know what a comparison rate is.
• 61% think they’d lose their money if their bank went under, despite the government guarantee.
• 57% don’t understand that banks determine interest rates they pay and earn, not the RBA.
• 36% don’t know that reducing the length of a loan reduces the amount of interest paid.
Emery believes that a factor underpinning the results is that people simply don’t find financial services exciting and don’t take the time to develop good habits.
“Yes, banking can be complicated but a lot of the information you need is actually not that complicated. People often don’t go looking for it because they find it boring. They think they know enough and they’re kind of doing all right, so they don’t spend time digging into it,” said Emery.
“Among the most worrying findings, 74 per cent had no clue about home loan comparison rates, meaning they may not be aware of the fees they’re paying.
“A home loan is likely to be the single biggest financial decision that most people make, so that suggests that the level of knowledge is probably not at a point where it’s going to help people make the right decisions.”
“We see that playing out day-to-day; for instance around savings rates – people will typically go to the big four because they think they’re safer. So they will accept a lower rate of interest on their savings accounts for that perceived security.
“If you think about the difference between a 3 per cent interest rate and a 2 per cent interest rate, that could be quite a lot of money from a savings perspective.”
Emery says that simplifying and standardising more aspects of the finance industry could help overcome its perceived complexity – a barrier for many consumers.
For instance, standardised aspects might include advocated mandated comparison rates, raising the monthly minimum credit card repayments above 2 per cent, and banning proactive credit limit increases.
“Most people aren’t aware that at 2 per cent, it’s going to take an awfully long time to pay that debt off,” says Emery. More than two-thirds of the survey respondents incorrectly answered a question about how long it would take to repay credit card debt with minimum payments.
Emery says that ME Bank would also support efforts to make switching between products easier, because it’s often something people avoid. “People think switching is going to be painful but switching can make a big difference.
“Making switching easier is really important because one of the things we advocate is for people to take a bit of time each year to look at their financial services products, jump online, shop around and see whether they can get a better deal.”
Emery says that part of ME Bank’s effort to improve financial literacy has been to establish an online tool called ‘Ed‘, which delivers customers 5,000 hours of free online education.
“Naturally, the most popular topics are centred on how to buy a home, how to create a budget and establishing money goals,” says Emery.