Many Americans lack a clear understanding of basic financial concepts and risk running up significant debts, a recent survey found.
Of 1,000 consumers surveyed, only 35 percent knew how interest compounds over time, while more than half didn't understand how minimum payments are calculated and applied to a balance, according to researchers at Harvard and Dartmouth business schools and TNS, a New York-based market research company.
Almost none of the respondents were able to distinguish the financial difference between paying in installments versus paying in a lump sum.
"There is a strong link between financial illiteracy and excessive debt," Peter Tufano, Sylvan C. Coleman Professor at Harvard Business School, said in a statement. "Those who severely underestimate the power of interest compounding don't understand how quickly debts can grow. They end up with more debt than they can handle."
About a quarter of the survey's respondents said they carried too much debt, and 11 percent said they weren't sure if they did.