(Disclaimer: I'm going to be a wimp and focus mostly on England and Western Europe post-1066.)

21st century people live in a world that relies heavily on text for public announcements and the structure of boundaries -- street signs and stop signs, newspapers and billboards, "Do Not Enter" signs and poison control labels -- but medieval people generally did not. The utility of these kinds of measures is pretty diminished if the majority of society at all class levels couldn't have used them. Even in modern contexts those written texts are generally supplemented by non-textual cues -- bright-red stop signs, bright yellow caution tape, skulls and crossbones, lightning bolts, Mr. Yuk. That kind of non-text visual cue would be familiar to medieval viewers -- the stereotypical image of this is "old-fashioned" signage that used visual emblems of the establishment's stock in trade or guild affiliation to indicate what they sold or did -- hops for a brewer, or a mortar and pestle for an apothecary, for instance. The sheer proliferation and richness of images and iconography in the Medieval world isn't solely a function of illiteracy -- literate people used such images in their work as well, and explanations for medieval church artwork that boil down to "people couldn't read, so they just looked at pretty pictures and thought they got the general idea" seem like they're selling medieval commoners short -- but this use of images in particular for signage probably helped people who could not reliably read unfamiliar words get by. You knew who people were by what they wore, and what establishments were and did by what they looked like.

If text in a certain language isn't ubiquitous, learning to read that language isn't broadly necessary. There was not an expectation in early medieval England or medieval Europe that the lower classes would be all able to read any given amount of text, across boundaries of role and gender, simply because the formal education associated with literacy was not accessible to these classes. There were in effect two standards of literacy -- familiarity with vernacular languages like French and English, and familiarity with Latin. Texts written for formal purposes such as legal documents and religious texts were generally written in Latin; in particular the idea of accessing religious scripture in the vernacular was a major controversy in the Middle Ages, so there was in no way the idea that even a poor person doing only manual labor would learn English in order to read their Bible (or by reading their Bible!) that would develop in later centuries. It's hard to get solid numbers for literacy in the Middle Ages because there was no formal standard for literacy at any given point, let alone across the decades or centuries. How literate is literate? Being able to read and write? Being able to read and write well? Being able to read the Psalms? Being able to read the court documents describing the forfeiture of your own property as a felon? Being able to sign your own name? Being able to read, as you say, a single word? Some of the most common standards for modern literacy -- street signs and warning labels, for instance -- weren't in the picture, simply because those things were not ubiquitous across classes. If the only road sign near you is the sign with one arrow pointing to your rural village and another one pointing to London -- well, you live there, you probably don't need a sign to tell you which way London is.

For the bulk of the Middle Ages, oral transmission of literature and information (like news or commercial info like shop orders) was the norm for most of society, but Latin was the gold standard for learned people's literacy. From the 12th century onward in England, if you were a man, having even a little Latin reading knowledge and being able to read that Latin out in court was enough to prove yourself a cleric and plead benefit of clergy in court -- potentially saving yourself from the death penalty in the process. Psalm 51 ("have mercy upon me, O God, according to thy lovingkindness" -- or maybe that should be "miserere mei Deus secundum misericordiam tuam") was commonly used as the test for this, and became known as the "neck verse" as a result. This was invoked as late as 1598 by playwright Ben Jonson, trying to wiggle out of being tried for manslaughter in a secular court.

For individuals who could not themselves read or write, dictation was an option -- one case study of the pitfalls of this might be 14th-15th century woman mystic Margery Kempe. Margery Kempe was a lay woman married to a fairly successful merchant, and she's best known as the author of a remarkable book detailing her life story and religious experiences. She had lots of problems in her life, but they were not generally the problems that a modern illiterate person might face -- she didn't risk mixing bottled prescription drugs with alcohol and poisoning herself, at least not because she couldn't read the label, or getting lost in a crowded Bishop's Lynn neighborhood, at least not because she couldn't read the street signs But during her religious journey she could not read or write, at least at a level of proficiency that matched what she actually wanted to do. She enlisted the help of clergy and family members to read out loud the religious texts she wanted to familiarize herself with, and to record the text she wanted to put down in her "Boke". Even within that framework, Margery had considerable difficulties. Her first attempt at dictating a text was a failure, for the man to whom she appealed for help in putting down her feelings and revelations on paper (an Englishman who had lived for some time in Germany) died before the work could be complete; when Margery brought the partial text to a priest she trusted, the text was 'so evilly-written' the second man couldn't make sense of it -- it was "neither good English nor Dutch" [meaning German, think 'Pennsylvania Dutch'] and even the letters were barely legible. Margery and her priest friend had to start over.

Summe of these worthy and worshepful clerkys tokyn it in perel of her sowle and as thei wold answer to God that this creatur was inspyred wyth the Holy Gost and bodyn hyr that sche schuld don hem wryten and makyn a booke of hyr felyngys and hir revelacyons. [...] Than had the creatur no wryter that wold fulfyllyn hyr desyr ne geve credens to hir felingys unto the tym that a man dwellyng in Dewchlond whech was an Englyschman in hys byrth and sythen weddyd in Dewchland and had ther bothe a wyf and a chyld, havyng good knowlach of this creatur and of hir desyr, meved I trost thorw the Holy Gost, cam into Yngland wyth hys wyfe and hys goodys and dwellyd wyth the forseyd creatur tyl he had wretyn as mech as sche wold tellyn hym for the tym that thei wer togydder. And sythen he deyd. Than was ther a prest whech this creatur had gret affeccyon to, and so sche comownd wyth hym of this mater and browt hym the boke to redyn. The booke was so evel wretyn that he cowd lytyl skyll theron, for it was neithyr good Englysch ne Dewch, ne the lettyr was not schapyn ne formyd as other letters ben.

So one could describe Margery herself as "illiterate", though she knew how to recite both Latin prayers and English-language prayers by rote, and one could describe her second transcriber who assisted the composition of her book as "literate" twice over, knowing both Middle English and Latin at a level of spoken and written proficiency. But what was up with the first assistant Margery worked with? Even being literate at a workable level (for the first assistant was presumably successful enough in business to get by not just in England but also in Germany, sufficiently so that Margery trusted him to put down her most intimate religious experience on paper) didn't necessarily mean you were literate at any standardized level. Silent or "voiceless" reading was not ubiquitous, and spelling itself in vernacular languages like English was not standardized but largely phonetic -- well into the Early Modern period, an individual who was highly proficient in both written and spoken English, like say, William Shakespeare, might spell their own name a half-dozen different ways. Even in Latin, spelling was a little more loosey-goosey than one might like. But if you know your alphabet from learning Latin, and if vernacular languages are largely phonetic, you should be able to sound out vernacular languages in their written form -- having a little Latin might mean you effectively knew a little [English/French/German/etc.] as well.

Literacy by gender is another tricky factor here -- women were generally barred from becoming lawyers or priests, but they were not barred from becoming nuns, and they participated in the business world in various ways that might have made language learning an asset. Some Renaissance-era Italian texts advocate teaching middle-and upper-class girl children to read, the better to familiarize themselves with devotional materials and domestic manuals designed to make them better housekeepers; others advocated only teaching girls enough for prayer. In 14th century Bohemia, wealthy women already literate in vernacular languages and familiar with vernacular texts (literature, poetry, etc.) who desired to read scripture in those vernacular languages were considered not merely heretical but dangerously disobedient -- nobody should be doing that at all, in the eyes of men who disapproved of those like Jan Hus and John Wycliffe who pushed for vernacular translations of the Latin Vulgate, but certainly not women of any social class.