Millions of consumers worldwide make decisions around applying for credit, taking out loans, and even financing their properties – without necessarily understanding all of the terms and costs. The global thought leaders of the loan industry must expand their services and foster better literacy among customers to create a more responsible and sustainable market.
Financial literacy, at its core, refers to confident knowledge of key concepts, such as saving, investing, and debt, and is essential to allow people to make informed choices about how they manage their money.
While South Africa ranks fairly well in terms of financial literacy levels (around 42% compared to a 33% global average), Brett Van Aswegen – CEO of the short term finance provider Wonga is urging that lenders do more to help safeguard their customers’ interests through education and learning initiatives. He argues leading lenders have an ethical obligation to ensure the safety of, and build trust with, customers.
The Value of Financial Literacy in a Credit-Led World
The overarching goal of financial literacy is to enable us to remain in control of our finances, access tools to manage money, and make choices that contribute to our aspirations.
For example, a financially literate individual might:
- Allocate earnings to repay debt as quickly as possible.
- Create a savings account to build a contingency budget.
- Consider options such as transferring credit card debt to a 0% interest account.
- Evaluate different borrowing options and the associated costs.
Being financially literate isn’t necessarily related to greater personal wealth but to have the information available to structure finances and prioritise while having a keen oversight over your circumstances.
Even an understanding of credit scores and how to access your credit report might seem an obvious resource – but it is something that financially illiterate people may not know exists.
Links Between Healthy Credit and Financial Literacy
It is all but impossible for anybody to improve and protect their credit score without a basic level of financial literacy. Credit is important for multiple reasons, and a badly managed credit record can make it extremely difficult to qualify for a loan, or purchase a home, with long-term ramifications.
There is also an association between financial literacy and equitable lending opportunities since:
- Those with a stable credit score qualify for lower-interest loans and borrowing products.
- Anybody with a badly managed credit report will typically be rejected for more competitive loans or end up having to pay much higher interest rates.
- Savings perks and product offers are reserved for applicants with good credit scores.
Even if you are conscious that your credit score isn’t great, you need to know which factors contribute to that score and take proactive steps to get yourself into a better situation.
Payment history is one of the most important metrics, accounting for about 35% of most lender credit assessments, along with elements such as credit utilisation.
Lender Responsibilities to Improve Financial Literacy Levels
Now that we have a good understanding of how financial literacy affects opportunity and borrowing costs, we’ll look at who bears responsibility for improving these relatively low literacy levels.
There are education initiatives, from general classroom learning to adult tuition programs – but many financially illiterate people may not know whether they are eligible or recognise the advantage of enrolling.
It isn’t appropriate to put the burden of responsibility on the individual if there aren’t accessible routes to gaining knowledge. Lenders across the world are bound by regulatory rules dictated by bodies such as the National Credit Act in South Africa or the Financial Conduct Authority in the UK for example.
While specific guidance varies, lenders cannot enter into credit agreements without conducting due diligence or where the lending constitutes an irresponsible loan.
Irresponsible lending could refer to a debt agreement that the applicant has no means to repay, lending above the limit suggested by an affordability assessment, or, crucially, offering a loan that the applicant doesn’t fully understand.
Therefore, Wonga strives to make financial literacy targets a goal for lenders alongside governments and education departments to improve socio-economic divides and empower customers to judge which borrowing products are best suited to their financial position.
The Advantages of Increasing Financial Literacy
From a banking perspective, it makes a lot of sense to invest in education materials and take the time to inform customers if they aren’t financially literate enough to make knowledgeable decisions.
Essentially, a financial institution
can make far greater profits from servicing clients with wealth than claiming interest payments from those in debt.
Historically, much of the lending sector has relied on debt as a primary income source.
Still, globally low-interest rates make this less viable and mean that even major banks are turning their attention towards helping customers grow their wealth.
It’s also important to think about the online nature of our transactional world and how a customer will make financial decisions not solely based on brand reputation but according to on the customer service available and reviews left by previous users.
A lender or bank with an active financial literacy program offering free resources to support their customers has improved prospects compared to competitors providing no such added-value service.
Fintech makes financial literacy tools more manageable and cost-effective than ever, including options such as:
- Automated alerts when account activities occur or a credit score changes.
- AI-driven chatbots to answer FAQs and provide help with completing forms.
- Data visualisations to replicate information in an easier-to-understand visual format.
- Reporting mechanisms to show customers how they manage their cash, which payments are pending, and their forecast balance.
By improving financial literacy, lenders fulfill their regulatory requirements to a gold standard and put their customer’s needs first, leading to improved borrowing access from a user base that is well informed about their rights and the suitable products to meet their needs.
