The proliferation of credit cards is relatively new, with plastic only becoming widely used around the 1950s. The dramatic shift to easily accessible money via credit cards has changed the way we wield our purchasing power and manage our money. Unfortunately, our education standards haven't kept up with these changes. We are not providing America's youth with the education they need to responsibly manage their finances and credit. America needs thorough and effective financial literacy education in its school system.
Without an inclusive and modern financial education, young Americans are being put at risk, making poor financial choices that will have a direct and lasting impact on their future financial health.
A 2012 assessment by the Program for International Student Assessment (PISA), conducted by the Organization for Economic Co-operation and Development (OECD), surveyed 29,000 students in 18 countries and economies. The United States came in at No. 9, in the Students and Money: Financial Literacy Skills for the 21st Century section, revealing that American students ranked below average in financial literacy, with 18 percent of U.S. students unable to perform basic financial literacy tasks. Shanghai (China) schools ranked first in the PISA data, with scores 119 points above the OECD average -- the equivalent to nearly three years of schooling. U.S. Education Secretary Arne Duncan says Chinese schools perform well because they identify students who are struggling and provide the support those children need.
Financial literacy education in the United States is severely lacking. According to the Council for Economic Education, only 22 states require a high school course in economics, only 14 states require a course in financial education, and a mere 5 percent of students claim to have learned about money from an educator.
How does this lack of knowledge manifest in the real world? It results in irresponsible spending, an increase in debt, inability to make ends meet and overall psychological distress. Seventy-five percent of college students are unaware of late payment penalties on their credit cards and are graduating with an average of $35,200 in education-related debt (student loans and credit card debt). This amount of debt can become a significant stumbling block when it comes to some college graduates' success. According to Pew Research, the median net worth of college graduates with no student debt is seven times greater than those who graduate with student debt.
The reasons for this gap in knowledge are complicated and numerous. Some experts don't see the need for financial education, arguing that good money management is a "habit" and can't really be taught. Others believe that high school students aren't capable of retaining the information they need to really change their financial behavior. In addition, the school system simply isn't set up to accommodate an increase in financial education. Many teachers lack the necessary educational background and aren't confident enough that they could effectively teach a financial literacy course. Finally, many school districts simply lack the budget to implement financial education in their schools.
None of these reasons are good enough to account for the disservice we're doing to our youth. Basic financial education must be in our schools. Every student that graduates from high school should be required to take a personal finance course. Even better, a basic personal finance course should be a prerequisite for all high school students in order to graduate.
The benefits of an education that includes financial literacy have been proven time and time again. Studies from the Council for Economic Education, (Survey of the States), the Association for Financial Counseling, Planning, and Education, and the National Endowment for Financial Education found a number of positive results in states where financial education is offered. Financial education that starts at an early age results in the implementation of healthy financial habits. Students from states where a financial education course is required are more likely to display positive financial behaviors and dispositions. They are also more likely to save money and less likely to max out their credit cards or make late payments. Research shows that individuals graduating from high schools in states that require personal finance education have higher savings rates and net worth, resulting in adherence to a budget and the ability to make purchases without using credit. They participate more often in retirement programs and make larger contributions to those programs.
The impact of responsible financial management is even greater than just one individual's credit score or the amount of money in their checking account. Our financial decisions have a direct impact on the economy. In 2013, the average FICO credit score was 646. However, most credit cards and loans require a credit score of 725 or better. Lending practices and requirements are tight due to default rates, bankruptcies and other variables, including the impact of our spending and saving -- or lack thereof.
Teaching students the concepts of saving, paying bills on time, investing and how the borrowing process works will result in improved credit scores and an increase in spending, all of which leads to an improved economy. It could mean lower interest rates, looser lending standards, lower costs, lower unemployment rates and less household debt. When we're saving and investing responsibly, the economy improves.
The OECD called financial literacy "an essential life skill" for teens. At a mere 15 years of age, most have bank accounts and debit cards -- but they don't know how to manage them responsibly. While the education system has made some progress in implementing financial education, it must be made a priority across all school districts, for all ages. At the very least, it must be a requirement for high school graduation. It is imperative that we prepare America's youth for their financial futures to ensure that they have the skills necessary to lead happy, healthy, financially responsible lives.
