People tend to overestimate their credit quality

Washington, June 3 : A new study by researchers at the George Washington University School of Business shows that people are more likely to believe that they had average or above average credit.

The same research also showed that people who overestimated their credit quality were less likely to budget, save, and invest regularly.

"Overestimating credit ratings is partly a function of a lack of financial sophistication. In addition, it appears that people who have overestimated their credit rating take less care in managing their finances," says Vanessa Gail Perry, Assistant Professor at the George Washington University School of Business.

For the study, Perry analysed data about 23,000 people from the Freddie Mac Consumer Credit Survey, which pertained to attitudes, behaviours, knowledge and experiences with credit and financial management.

The results of the study suggested that about 32 per cent of the respondents overestimated their credit ratings, while only four per cent underestimated their credit ratings.

According to Perry, the results backed previous findings showing that individuals were more likely to be overconfident about their knowledge or abilities.

The researcher further said that the study also showed that people who overestimated their credit ratings had lower incomes, less formal education, and were less likely to own their homes.

Furthermore, such people were more likely to be African-American, Hispanic or female.

Perry said that a reason for such findings could be the fact that minority consumers in general had less experience with financial markets, and that in turn affected their tendency to overestimate their credit rating.

The study has been reported in the Journal of Consumer Affairs.

ANI