Financial literacy and consumer credit portfolios

We use survey data from a sample of UK households to analyse the relationship between financial literacy and consumer credit portfolios. We show that individuals who borrow on consumer credit exhibit worse financial literacy than those who do not. Borrowers with poor financial literacy hold higher shares of high cost credit (such as home collected credit, mail order catalogue debt and payday loans) than those with higher literacy. We also show that individuals with poor financial literacy are more likely to lack confidence when interpreting credit terms, and to exhibit confusion over financial concepts. They are also less likely to engage in behaviour which might help them to improve their awareness of the credit market.

► We analyse financial literacy and consumer credit portfolios. ► We use survey data from a representative sample of UK households. ► Less literate households hold higher shares of higher cost debt. ► This effect is due to consumer behaviour in credit markets. ► Less literate households are also less likely to acquire financial information.