Financial capabilities, or money-management skills, are crucial for Americans as debt and credit constraints increasingly become barriers to building asset wealth. Financial education and exposure to financial instruments in childhood are linked with greater savings as an adult. Research shows parents are children's primary source of financial education. Despite its importance, little is known about the effect of parental teaching of money management on children's later financial outcomes, particularly among low- and moderate-income (LMI) households. This study focuses on LMI homeowners to examine the association between prior parental teaching of money management and present-day credit outcomes. This study also tests whether the relationship between respondents' educational attainment and credit scores differs by prior parental teaching of money management. The inclusion of credit scores offers a unique opportunity to understand how childhood experiences impact later financial outcomes.
This study uses LMI homeowner data (n=2,389) from the 2005 Community Advantage Secondary Market Program (CAP) survey. CAP is a secondary mortgage market pilot program for LMI households, operated in 49 states. The dependent variables are credit scores and credit debt. Prior parental teaching of money management is categorized by three groups: “none” (n=704, the reference category); “some” (n=865); and “a lot” (n=820). We control for individual characteristics (i.e., education, gender, age, race, marital status, income, and household composition) as well as parental characteristics during respondent's childhood (i.e., parent receipt of welfare, parent homeownership, and parent bank account ownership). We conduct ordinary least squares to predict credit scores, and Tobit regression for total credit debt because of its censored distribution. We conduct regressions for the full sample to find the association between prior parental teaching and credit outcomes, and separate regression models by prior parental teaching to examine the association between respondent's education and credit outcomes by prior parental teaching.
Prior parental teaching is significantly associated with credit outcomes. The mean credit score for respondents who report “a lot” of prior parental teaching is 9.5 points higher (<.001) than the mean credit score for respondents who report “none.” The respondents who report “a lot” of prior parental teaching also have significantly lower credit debt (<.01). The association between education and credit scores is found to differ by prior parental teaching. Among respondents who report no parental teaching, there is no significant relationship between education and credit scores. However, among respondents who report “a lot” of parental teaching, higher education is found positively related to credit scores.
This study demonstrates the critical role that parents play in building children's financial capabilities. Developing policies and programs which encourage and strengthen parental teaching of money management holds promise to improve financial outcomes for the next generation. Further, this study reveals a strong positive effect on credit outcomes for adults who both received high levels of parental teaching of money management and also attained a college degree. This finding has critical implications for the growing field of children's development accounts, which combine financial skill building for parents and children with matched savings for college.