Millions of UK adults are using credit without fully understanding borrowing costs or how their financial behaviour affects their credit profile, new research suggests.
As many as 12 million adults with credit products are not confident they understand APR, one of the key measures of borrowing cost, according to research from Creditspring.
The findings point to a widening financial literacy gap, with millions potentially taking on loans, credit cards and buy-to-let alternatives such as Buy Now, Pay Later (BNPL) products without fully grasping how they work.
CONFUSION OVER BORROWING COSTS
While 84% of adults have used some form of credit in the past year, only 28% say they are very confident they understand APR, with 26% admitting they are not confident at all.
This leaves around 12 million adults unclear on how interest and charges affect the total cost of borrowing.
The research also found widespread misunderstanding of so-called 0% interest products. Around 25% of respondents believe such offers carry no risks or costs, overlooking potential fees or penalties. Given the scale of credit usage, this equates to approximately 11.6 million people currently holding credit who may not fully understand these products.
BNPL MISCONCEPTIONS PERSIST
Confusion is also evident in the use of BNPL products. Although 20% of adults have used BNPL in the past year, more than a third believe these products are already fully regulated.
In practice, full regulation is not due to come into force until July 2026, meaning around 3.6 million users may overestimate the level of protection currently in place.
There is also uncertainty around how BNPL affects credit profiles. Nearly a quarter of respondents believe it has no impact on their credit score, while 28% say they are unsure.
MISUNDERSTANDING OF CREDIT SCORES
The research highlights broader gaps in understanding what influences credit scores.
While most respondents correctly identified that missed repayments and late bill payments have a negative impact, misconceptions remain around other factors.
More than half believe income directly affects a credit score, while 44% think renting rather than owning a home makes a difference. Nearly three in ten also believe postcode is a determining factor.
At the same time, fewer than half correctly identified that being on the electoral roll can affect a score, and only 46% recognised that using multiple names across financial records can have an impact.
Understanding of more technical aspects is also limited. Just 58% identified credit utilisation as a factor, 54% understood the role of credit history length, and only 37% were aware that closing old accounts can influence a score.
AFFORDABILITY ASSUMPTIONS
Misconceptions extend to affordability assessments, with 32% of adults assuming that credit approval means a lender has confirmed repayments are affordable.
In reality, approval typically reflects whether minimum lending criteria have been met, rather than a detailed assessment of financial resilience.
Although confidence is higher when it comes to repayment terms and interest-free periods, fewer borrowers feel confident about affordability checks or deferred payment credit, suggesting gaps remain in understanding risk.
Neil Kadagathur, chief executive 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.
“Closing this financial literacy gap must now be a priority. Lenders, regulators and policymakers all have a role to play in making credit simpler, more transparent and easier to understand, so people can make informed decisions with confidence.
“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.
“What’s particularly concerning is the confusion around credit scores. Many people believe factors like income or where they live determine their score, when in reality it’s driven by behaviours, such as repayment history and how credit is used.
“That misunderstanding can lead to poor decisions or unnecessary confusion and anxiety about borrowing.
“Together, these findings point to a financial literacy gap with real world consequences including how people manage and access credit day to day.
“When borrowers misunderstand both the cost of credit and how their financial behaviours are assessed, they are more likely to make decisions that lead to avoidable stress, higher costs, or exclusion from mainstream lending.”
For lenders and intermediaries, the findings underline the continued importance of clear communication and borrower education, particularly as credit products evolve and become more accessible.
