The number of personal bankruptcies has been growing in recent years hitting a record high of over 19,000 in 2013, a sign that many Czechs still have a problem managing their finances. A recent poll conducted by the finance ministry showed that two thirds of Czechs were not sure about the difference between a banking card and a credit card and respondents admitted they spend on average around five minutes studying a loan contract they are going to sign. I spoke to David Šmejkal the head of a Prague-based advisory office for people with financial problems about the state of Czechs’ financial literacy.
“There are a lot of people coming to our advisory offices, people with very low financial literacy. The reason is that until recently our education system provided no possibilities for students to get a financial education, to be taught how to handle money, either at primary or secondary school. For adults there are almost no possibilities to receive this know-how except by learning from life, from their own and others’ experiences. “
So what are the most common mistakes that people make?
“The most common mistakes are nearly the same as those made by people in other countries – overestimating one’s possibilities of repaying a loan and underestimating the need for financial reserves and not thinking about possible problems in the future.”
According to a recent poll, people spend on average five minutes reading a contract they are going to sign. Is that true?
“It could well be so. Contracts tend to be confusing, they are very long, they are written in complicated “legalese” and so for most consumers it is almost impossible for them to comprehend everything such a contract entails. But there are now some very positive initiatives coming from NGOs pressuring financial services providers to adjust these complicated agreements to the needs of consumers.”
Who are the people most at risk?
“It is predominantly people who are threatened by unemployment or who only have seasonal work. Also people with a very low level of education, single parents, above all single mothers and pensioners –seniors with a low pension –they have a problem. “
“There are responsibilities on both sides, on the side of the provider as well as the borrower. The Czech Republic has effective consumer credit legislation but the problem is its implementation and effective control on the part of the state authorities. “
Can you tell me what exactly it is you offer clients? What kind of assistance you provide?
“We listen to the client in order to gain thorough information about his or her financial circumstances, we analyze the situation and try to find a solution. In about 60 percent of cases we find there is no other option but the possibility of filing for bankruptcy. We file on behalf of the client, free of charge as opposed to other types of companies which profit from the situation.”
After the fall of communism Czechs – understandably –tried to make up for the lost time, for opportunities lost and they wanted everything right away. People took out loans in order to buy electronics and go on foreign holidays. Is this still happening? Are Czechs still buying things that they simply can’t afford?
“That’s the power of advertising. Ads are highly professional and are especially potent on people with a lower education and people who are unable to consider the risks. So yes, this behavior is quite common and our advisory service has no power to change that.”
If you were to compare the behavior of Czechs in this respect with the behavior of Austrians or Germans –how much worse off are we?
“I think that the behavioral patterns are very similar, but there are some very important differences. Our client –in comparison to the Austrian or German client –has a very low awareness of the risks involved. Czechs lack the possibility to learn about the problems that taking out a loan could involve. In other words they lack financial literacy, or know-how. That is the first ting. Secondly the state authorities in their controlling role are weaker than their counterparts in Germany or Austria. The Czech state administration is still trying to improve its efficiency in the area of consumer credit.”
Financial literacy has now been introduced as a compulsory subject taught in primary schools. How effective is it proving and how long will it take for the new generations to be more literate in terms of handling their finances?
“It depends of the quality of this education, but it could take about ten years or more for the results to be seen in our daily life.” If you were to say what would help – apart from the fact that children are now taught how to handle money from an early age – what would improve the situation?
“I would stress the role of public administration to narrow the playing field, so to speak. There are well functioning financial services providers and there are providers who are breaching the law. If providers are cheating clients they should be effectively pushed out of the market by the authorities. The second thing is marketing. Marketing should be pushed –by law – to give some small part of marketing expenditures to finance awareness campaigns regarding the risks of borrowing. Awareness of APR –in other words -the possible problems which could arise in the course of repaying a loan. And I firmly believe that more stress should be placed on advisory services which are the only institutions where people in financial trouble can get assistance free of charge.
If you were to give a single piece of advice now to someone who may be considering taking out a loan what would it be? What should they consider?
“APR –that I would focus on primarily, the possible complications that may arise. Also the reputation of the creditor they are dealing with. We have on the market not only banks but non-banking creditors and such unlicensed creditors could turn out to be very problematic indeed. So not just APR, but a good creditor. And then to study the sanctions and penalties which are applicable in the event that the agreement is breached. It is also very important to think about your financial reserves –the best thing is to have some financial reserves available before getting out a loan. These are the most important things people should think about. “