CFCM 12/06: Financial Literacy and Consumer Credit Portfolios

Abstract

We use survey data from a sample of UK households to analyse the association between financial literacy and consumer credit portfolios. Among users of consumer credit there is much variation in levels of financial literacy. 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 estimate the cost of poor financial literacy in a multivariate setting by calculating the difference in average APRs paid by more and less literate consumers. We also show that households with poor financial literacy are typically self-aware: they 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 financial literacy and awareness of the credit market.

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Forthcoming in Journal of Banking and Finance

Authors

Richard Disney and John Gathergood

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