What more can households do to survive the cost of living crisis? With bills and everyday essentials skyrocketing and many households already cutting costs whenever they can, it feels as though family finances are on a knife edge. UK households are under increasing pressure, and many are struggling to stay afloat, let alone save.
The future is looking bleak for many too – CEBR research suggests that within two years households could be £100 per month short and finding it impossible to cover their essential spending, as costs rise much faster than incomes.
Against this backdrop, it’s no wonder that almost half of people (44%) feel anxious when they think about their finances. A combination of macro-economic factors over the last couple of years, from Covid-19 to the war in Ukraine, has created a perfect storm that has left many households in a perilous position. They need more support to get them out of the financial struggles they are facing, – and the financial services industry has a duty to support its customers and work to boost the UK’s financial literacy levels.
Financial illiteracy breeding misconceptions
Our Financial Stability Tracker found that one in three people are deemed financially illiterate in the UK, meaning they have difficulty converting weekly bills to monthly or annual amounts or entirely understanding a payslip. The lack of financial education available in the UK is alarming and can prove dangerous for many households and their budgets.
There are many misconceptions that come with this lack of education. Fewer than half (48%) of people know that their partner’s credit score affects theirs. This means that if one partner has a bad credit history or report, it can reduce possible credit options for both. But as one in five (21%) only check their credit score once a year, unfortunately some may only realise that they have limited options for credit when it’s too late.
Many don’t realise the impact that having a bad credit score has on their finances. This can make it difficult to access affordable loans, leaving people with no option but to go to high-cost lenders with interest rates that are almost impossible to pay back, resulting in an ever-increasing debt spiral where the borrower has to keep seeking credit just to meet repayments. The lack of financial education in the UK compounds the issue and means that it is very easy for people to fall into this debt spiral – and even harder to get out of it.
~Novel Serialisation: Heavens Fire~
The real-life picture
One of our customers, James, a money advice specialist, considers himself financially educated now, but hasn’t always felt that way. In the past he made poor financial decisions, which are still impacting him today. Payday loans taken out when he was younger quickly accrued interest, and James found himself in debt. By not understanding credit or how these loans worked, James felt unable to get out of debt. His lack of access to a financial education when he was younger caused him to make mistakes that still impact his creditworthiness today. Now, to achieve his goal of being approved for a mortgage in the next five years, James needs to find stability within his finances and know where his money is going. James has been using Creditspring’s educational tools to research what he needs to do to improve his credit, as well as to keep up with his finances.
Unfortunately at present many borrowers with poor credit files – like James – have no alternative but to seek credit from high-cost lenders – however, improving financial literacy can reduce this risk for people in future.
Borrowing money often comes with a negative reputation and stereotype – that the borrower will immediately get into debt and not be able to get out. It’s important for people to learn – particularly as the cost of living increases – that borrowing does not have to mean immediate debt. There are affordable credit options that can help UK households manage their finances and both understand and boost their credit score.
Time for financial service providers to step up
Improving financial education doesn’t mean enrolling on a finance degree, it can simply involve allowing people to understand their options and knowing where to go for financial support, if and when it’s needed – and financial services providers will be the natural place for many to turn.
Becoming financially educated will help UK adults to improve their creditworthiness, save money and equip them with all the tools they’ll need to emerge from the other side of the cost of living crisis financially stable and secure.
By Neil Kadagathur, Co-Founder and CEO at Creditspring
