Special to the Financial Independence Hub
Do you consider yourself financially literate?
When we posed that question to Canadians last month in an IPSOS survey, the overwhelming majority — 78% — said yes.
Canadians are clearly confident about their financial knowledge. But their actual knowledge, unfortunately, is lacking. When we followed up our initial question with a quiz, comprised of 15 intermediate questions about financial products, the majority of Canadians (57%) failed.
It should be noted that these weren’t simple questions. But they also weren’t questions that require special certification or an advanced knowledge of finance. One question asked whether there were financial institutions in Canada that offer free chequing accounts (there are). Another asked whether you needed a special license to buy stocks (you don’t).
Failure to know the answers to these questions shows that Canadians are confused about financial products. And financial institutions take advantage of that.
Let’s return to the question on chequing accounts. About 34% of those surveyed said they thought all banks charge you money to have a chequing account. Another 14% said they didn’t know the answer. With nearly half of Canadians not realizing free chequing accounts are an option, it’s no surprise many financial institutions continue to charge for them.
Then there is the issue of mortgages. Of our 15 questions, Canadians struggled with ones related to mortgages more than any other. For instance, we asked whether a mortgage term refers to the length of time you need to pay off your mortgage. 51% of Canadians answered incorrectly. Another 18% said they don’t know. (For those wondering amortization refers to the length of a mortgage, a term is how long variables such as your interest rate are in effect.)
So what?, you might say. What does a mortgage term have to do with being knowledgeable about finance?
It all comes down to empowerment. If you’re familiar with how a financial product works, you’re more likely to be confident in getting the best deal for that product. Knowing what a mortgage term is you probably know that you can negotiate mortgage rates, or that you can go online and see different rates from rival banks and brokerages.
In the mortgage world, securing the best rate means saving hundreds or even thousands of dollars every year.
Earlier this year, CBC found that the big banks have been forcing financial products onto consumers and pitching high-interest rate mortgages. While part of this can be blamed on a culture problem at the big banks, they were also able to get away with it because consumers are simply uninformed. Our survey clearly demonstrates this.
We hope it will serve as a wake up call. Financial literacy is more important than ever for Canadians, and it’s time both government and the financial industry work together to make sure that the issue is taken seriously.
The full report can be accessed here.
Editor’s Note: See also Jon Chevreau’s blog on this topic that ran Thursday at Motley Fool Canada: Overconfident Millennials and Gen X Flunk Financial Literacy Test, but Boomers Only Marginally Better
John Shmuel is the managing editor and senior writer for LowestRates.ca. Before joining the team, he spent seven years covering investing and economics for the National Post. His reporting has taken him around the world — from a lobster fishing boat on the Bay of Fundy to a robot fitness class in Tokyo. John is a graduate of Ryerson University and a board member of the Society of American Business Editors and Writers.