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Financial Literacy and Consumer Credit Portfolios

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  • Richard Disney
  • John Gathergood

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.

Suggested Citation

  • Richard Disney & John Gathergood, 2012. "Financial Literacy and Consumer Credit Portfolios," Discussion Papers 12/06, University of Nottingham, Centre for Finance, Credit and Macroeconomics (CFCM).
    • Handle: RePEc:not:notcfc:12/06
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    More about this item

    Keywords

    financial literacy; consumer credit; debt portfolios;
    All these keywords.

    JEL classification:

    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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