When Stephen (pictured above with his CAP Debt Coach) had an accident that meant he could no longer work after 26 years, his Universal Credit and Personal Independence Payment, intended to support people with disabilities, did not cover his basic living costs. He began to borrow money to help ease the financial pressure but ultimately this was not a solution. Stephen found himself cutting out as much expenditure as he could, but he still worried about how to pay the bills that were landing each month.
What do you do if you get an unexpected bill? What if the washing machine breaks? Or suddenly you find yourself experiencing a big life event, like being made redundant or being diagnosed with a life-changing health condition?
When credit is the only option
Like Stephen, for nine in ten (88%) of the people we help at CAP the only option they had was to turn to credit to help them through a crisis. This puts people at risk of problem debt, if they are unable to keep up with debt repayments on the liabilities they owe, which can then spiral out of control.
Previous research has found that over four million people across the UK now depend on credit to make ends meet – this has been termed the ‘credit safety net’. Christians Against Poverty’s new report Lifelines to safety finds households where someone has ill-health or caring responsibilities are particularly prone to needing credit to help them cope financially.
No one should be forced to use credit as a replacement for a dignified income. The reliance on credit as a lifeline in the UK today contributes to the millions of people who are drowning in the storm of problem debt, and this is only worsening in the cost of living crisis.
How do we turn this tide? Here are our three steps to breaking the UK’s reliance on credit in a crisis:
1. Improve financial resilience by shoring up incomes and supporting saving
Millions of households have little surplus income after essentials, and this is only worsening in the cost of living crisis. This means that many are being pushed into debt simply by attempting to meet their everyday needs. The most common driver of credit use amongst CAP clients is an unaffordable household bill.
Financial resilience is especially out of reach to younger adults who receive lower minimum wages and social security payments, despite having the same living costs. To address this we need to scrap the lower age thresholds for the National Living Wage and Universal Credit. It’s the same groups who need help from our social security system, like Jobseeker’s Allowance, who most often turn to credit to cope with an unaffordable household bill.
We can improve people’s resilience in a financial crisis by ensuring they have a liveable income that covers their essentials and allows them to build up a small savings buffer. This can be done through a cost of living review of social security adequacy and ensuring Local Housing Allowance and the benefit cap keep pace with inflation each year. We also need to expand the Help to Save scheme to all Universal Credit claimants (not just those in work), and broaden the organisations that can offer it to include credit unions and other providers of low-cost credit. This will ensure it can be more easily accessed and promoted.
2. Make it easier to access non-credit lifelines in a crisis
We cannot always stop crises from happening. While we can do much more to help people have the resilience to weather these storms, we all need help sometimes. We need better non-credit lifelines that can bring people to safety without pulling them into debt.
57% of CAP clients used credit because they could access the money instantly or within 24 hours. We need lifelines that can rival the confidence and speed credit offers. Currently there is a lack of awareness and access to other lifelines, like claiming on an insurance policy or accessing grants and financial support from the social security system. However, even when these are used they are insufficient to deal with the problems people are facing. For instance, 30% of CAP clients who received Statutory Sick Pay still needed to use credit.
We could improve non-credit lifelines by expanding the statutory Mental Health Breathing Space scheme to Northern Ireland and to households receiving a terminal illness diagnosis. This would provide 60 days of relief from creditor enforcement while someone gets back on their feet after a life-changing event. We also need to reduce the waiting time and the minimum amount that can be borrowed through Budgeting Loans from the DWP (or Department for Communities in Northern Ireland). Currently these can only be accessed after six months and for amounts over £100.
3. Make credit safer for people who still turn to it in a crisis
There will always be some people who choose (or have no choice but to use) credit to get through, and when they do there should be safeguards to protect people from spiralling into debt.
Most credit is regulated by the Financial Conduct Authority (FCA), but in recent years there has been fast-paced growth of digital Buy-Now-Pay-Later loans. One in ten CAP clients have now used this type of credit. This is not regulated as consumer credit because interest is not charged, but there are still risks if people miss payments. The Government, under the former Prime Minister, Boris Johnson, said that they would bring this type of lending under FCA regulation and consulted about how to do this, but this has since been delayed. Buy-Now-Pay-Later could be a really useful source of low-cost credit for people, but it must be safe to use. We urgently need to see regulation introduced for unregulated digital Buy-Now-Pay-Later products.
There are currently trials underway for a No-Interest Loan Scheme (NILS) through credit unions. However, 45% of CAP clients value online access when choosing to use credit to help them in a crisis, and many value obtaining credit directly from the provider of the goods or services they need. We would welcome more bespoke pilots of a digital, fast-access NILS, and a scheme dedicated to the provision of white goods alongside the current pilot.
Another suggestion is for the FCA to introduce a cross-cutting ‘must have regard’ to financial inclusion. This would require them to challenge firms to treat their customers fairly and seek good outcomes for them, but also to ensure that everyone has access to safe products and services that allow them to be financially included. This could help develop a better offering for low-income consumers.
Turning the tide
At CAP, we want to see people equipped and empowered to maximise their financial wellbeing. Saving and resilience are key to helping people achieve financial security and freedom – both now and in the future. However, too many people are currently left without life jackets to protect them from the depths of financial hardship. While most low-income households try to grasp onto non-credit financial lifelines, many are insufficient, hidden or lie beyond their reach. But there are tangible things we can do to turn the tide.