UK faces financial literacy crisis as households misjudge credit risks

The UK is facing a growing financial literacy crisis, with millions of households navigating credit without fully understanding how it works, according to new research from Creditspring. 

As borrowing becomes faster and more accessible, consumers risk making costly, but entirely avoidable, financial decisions. Across the UK, understanding of even the most basic credit concepts remains low. Less than half of people (42%) feel they would be able to explain the total amount they would need to repay prior to taking out a loan to someone else. Furthermore, only around a quarter (27%) say they could confidently explain APR to someone else, and one in five (19%) are unsure which figure shows the total cost of credit when comparing product options.

Credit scores remain a particular source of confusion. Only a third (36%) of people say they could confidently explain what a credit score is, while more than half (53%) incorrectly believe their income directly affects it. Many are also unclear on how newer products, such as BNPL, interact with their credit profile, with nearly 3 in 10 (27%) unsure whether it has any impact at all.

This financial illiteracy is particularly stark when it comes to 0% interest products. A quarter (25%) of consumers believe these products are completely risk-free, while a further 20% are unsure what 0% interest actually means. There is also a clear gender gap in the understanding of 0% interest, as women are more likely to be uncertain, with 24% saying they’re unsure compared to 17% of men.

The research reveals a clear link between income and financial literacy and confidence. Just 31% of those earning between £15,000 and £25,000 feel confident explaining credit scores, compared to 56% of those earning over £75,000. A similar gap exists for understanding of APR, where confidence doubles between lower (23%) and higher (46%) income households. This suggests that those with the least financial resilience are often the least equipped to navigate credit effectively.

Neil Kadagathur, CEO of Creditspring, said “Credit has become faster and more widely available than ever before, but consumer education hasn’t kept pace. Our research shows that people aren’t making reckless decisions, they’re making decisions without being given the full picture. When key concepts like APR or total cost aren’t clearly understood, it becomes far easier to misjudge risk and fall victim to financial instability through no fault of their own.

“Improving financial education is critical, but the system itself must also be easier to navigate. We urge lenders, regulators, and policymakers to make financial education a priority and set clear standards for how financial products are presented, ensuring they are transparent, accessible, and designed to help consumers make informed decisions without unnecessary risk.”