Millions driven to harmful desperation borrowing as financial pressure on households deepens
The number of people finding it hard to keep up with bills and credit commitments has doubled since the start of the pandemic according to new research from StepChange Debt Charity.
The charity has found the proportion of people struggling is now nearly one in three (30%) GB adults – 15 million people – compared to 15% (7.5m people) who say they were struggling in March 2020.
The findings are part of a new report – Falling behind to keep up: the credit safety net and problem debt – which reveals the pandemic has further entrenched the use of consumer credit to make ends meet.
The report finds 8.6 million people in financial difficulty in Britain borrowed £26 billion to cover their basic needs in the last year. This includes 3.5 million people who have used credit to pay essential bills.
The number of people resorting to credit is expected to increase as the cost-of-living crisis pushes up the price of basic household essentials.
StepChange’s research reveals a credit market that does not always work for people in financial difficulty, with two-thirds (65%) of those in difficulty having kept up with credit repayments by missing bills, borrowing from family and friends or being forced to cut back to the point of hardship.
Despite rules designed to ensure those in financial difficulty access support, fewer than one in four of those struggling with credit repayments are in contact with their bank or credit firm.
Strikingly, half of GB adults (53%) say that they would be reluctant to seek help with financial difficulty from a bank or credit firm due to concerns about credit reporting and the anxiety and stigma of talking about financial difficulty.
The report finds that rather than access help, people struggling with debt can instead experience steps that make their situation worse. Among Stepchange clients who responded to an online survey, 26% were offered further credit after they were in financial difficulty, 35% had a payment taken they could not afford and 51% had interest added to a debt.
The lack of effective early intervention to identify and provide those in financial difficulty with a safe, fair way out of unaffordable debt is causing social harms, with 6.4 million struggling GB adults saying credit has had a negative impact on their health, relationships or ability to work in the last 12 months.
The research, based on a national survey of GB adults and an online survey of StepChange clients, highlights poor practice in the credit market such as ineffective affordability checks and automatic credit limit increases that draw financially vulnerable households into unmanageable debt.
With the cost-of-living crisis now further squeezing budgets StepChange is warning that many more people are likely to use credit to pay for essentials in the coming months. Urgent action is needed to support households to meet essential costs without resorting to credit.
The Financial Conduct Authority recently announced proposals to implement a new Consumer Duty that will require firms to focus on delivering good outcomes for consumers. StepChange is calling for the FCA to ensure the Duty changes practices that are failing consumers, including:
- Raising standards of lending and addressing unaffordable credit limit increases so that fewer stretched households build unaffordable credit card debt
- Requiring firms to intervene proactively and provide a widely available and safe offer to customers unable to keep up with repayments, building on learning from payment deferrals offered during the pandemic.
StepChange is also calling on the Government and the FCA to do more to provide alternatives to borrowing for households that are struggling to meet unexpected expenses, through grants via the social security system and a government-supported no interest loan scheme.
StepChange Chief Executive Phil Andrew said: “The sharp rise in the number of people struggling to meet their financial commitments should raise alarm bells across Government, banks and regulators.
“We are two years into a financially damaging pandemic and going through the sharpest cost of living increase in a generation. While consumer credit can potentially play some part in helping people navigate short-term pinch points, this must not be at the cost of their long-term financial and personal wellbeing.
“For our clients, a cost-of-living crisis is not new – for years we have been seeing a steady rise in the number of households who experience debt simply through a prolonged period of not having enough income to meet their basic needs.
“However, the number of such households looks set to grow, and in the absence of public policy intervention the risk is that such households will have no other option but to turn to borrowing in the short term, which will only exacerbate and prolong their financial difficulties.
“Those responsible for the steering us through these choppy financial waters need to be attuned to the harm many credit products, made available to people on the cusp of financial difficulty, can cause.
“The new Consumer Duty is a crucial opportunity for firms to redesign products and change practices to ensure credit does not exploit financial difficulty and those in difficulty get effective help fast.
“To resist acting is to risk a rapidly escalating debt crisis, particularly among lower income households.”
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