Financial illiteracy affects most of us. A Financial Times survey, conducted by Ipsos Mori in 2021, found 90% of people in England felt they’d learnt “nothing at all” or “not very much” about finance at school. So if you’re struggling with financial illiteracy you’re not alone. But what does it all mean?
Financial literacy is generally considered to be where somebody is able to run a bank account, reduce debts, make savings and investments, and keep up to speed with monthly payments like rent and energy bills. But misleading financial products and services can catch people out. So how can you avoid the dangers of financial illiteracy?
What is financial illiteracy?
Simply put, financial illiteracy means not being able to build strong financial foundations for yourself or your business. While you might think of it as ‘not being able to read or write’ when it comes to your money matters, it’s a little more complicated than that. And it’s important to say that it can affect people of all ages and backgrounds.
Financial illiteracy is where you don’t possess enough knowledge of financial systems to make good choices that take care of your financial wellbeing.
Many consumers don’t fully understand the financial products and services that are sold to them. And it’s important because there are so many products out there, and so many ways for you to buy things on credit!
What are the consequences and effects of financial illiteracy?
Not fully understanding commercially available financial products and services can lead to poor planning and money management, leaving you vulnerable if you don’t have emergency savings or options for retirement.
Also, if you don’t fully understand the often complicated financial products and services that are offered to you, you could be at risk of snowballing money problems due to high interest rates, mounting debt and scams.
Not only that, but financial illiteracy can make it a lot harder to get your money back on track if you find yourself struggling. It’s a serious cycle of cause and effect.
Is financial illiteracy a cause of financial exclusion?
Financial exclusion is where people find it hard to access and use mainstream financial products and services — for instance, being able to access credit cards or loans, when needed. The knock-on effect of this is that people can face wider social exclusion, where they struggle to get jobs, housing, education and health care.
Part of the problem is that certain financial products and services are not always appropriate (for example, taking out a mortgage when the monthly repayments aren’t affordable) and financial illiteracy stops people fully understanding them.
This can lead to people choosing the wrong products and services for their needs and means, which in turn leads to money problems and mounting debts (turning to a payday loan, for example, may seem like a quick-fix but could ultimately leave someone in much more debt long term).
This can impact your credit history and hurt your credit score. As lenders look at credit reports to decide whether they’re willing to offer you loans and credit cards, and at what interest rates, you could suddenly find that it is harder to access the financial products and services that might help you get out of trouble. In this way, financial illiteracy can cause financial exclusion.
What is the cost of financial illiteracy and exclusion?
As mentioned above, financial illiteracy can lead to poor decision making when it comes to choosing financial products and services, leaving you with higher interest rates and subprime mortgages that make it harder for you to manage your money.
If you find yourself struggling, your credit score can take a hit and you can find yourself dealing with mounting debts, County Court Judgments (CCJs) or even bankruptcy.
While this won’t always be the case, the knock-on effect could damage your financial wellbeing — leading to stress, anxiety and problems with your mental and physical health. Financial illiteracy is a problem for all of us because it can have a negative impact on society’s economic stability.
How to become financially literate
It’s important to understand that many people would be considered as financially illiterate, and it’s not a reflection on intelligence.
It’s about understanding often complex financial systems that we aren’t properly educated about. The first step is to not let financial literacy be a taboo. So let’s talk about it!
Create a budget
While this might sound complicated, creating a budget is actually really simple. You can use the 50/20/30 budgeting plan which makes it super easy to break your income into chunks that cover your essentials (50%), your savings (20%), and the remaining on your leisure (30%). You can read more about budgeting plans and which one might be best for you here.
You can also access a budgeting PDF and other financial planners for free when you sign up to Loqbox Coach — It’s our one-stop shop for building your financial know-how.
Stay on top of your bills
Making sure that your bills are always paid in full and on time will go a long way towards easing your money problems. So chuck them all onto Direct Debits that automatically come out of your account just after pay day. You won’t even see them leave, and you won’t be able to accidentally spend the money you need.
Check your credit score
Understanding your credit reports will really help you build your financial literacy. Your credit score lets you know how lenders view your credit history, and will give you an idea of whether there is anything on your credit report that needs fixing. You can find out more about what a credit score is here.
You can check your credit score for free and without hurting it using one of these services:
*We earn a small commission if you sign up for ClearScore using this link. Just wanted to let you know!
Get started with Loqbox!
For a proven way to build your credit score, get started with Loqbox.
You could boost your credit score by up to 125 points in six months, on average, by using Loqbox Grow.
Improvements to your credit score are not guaranteed.
We report your membership payments to the top three credit reference agencies (CRAs) in the UK: Experian, Equifax and TransUnion. Plus, you can build your financial knowledge and master your money, on your credit-building journey.