Falling behind to keep up: the credit safety net and problem debt

• Description of the programme
• The study
• Key findings
• Points to consider

Description of the programme

Consumer credit is, in the right circumstances, socially and economically useful. But credit products can also cause harm and poor outcomes. This is particularly the case when credit is used as a safety net—that is, to meet essential costs by those coping with financial difficulty.

Using credit is commonplace: the Financial Conduct Authority (FCA)’s Financial Lives survey suggests that in February 2020, 85% of UK adults had outstanding credit or had used credit in the previous 12 months.

The FCA recently announced proposals to implement a new Consumer Duty that will require UK firms to focus on delivering good outcomes for consumers, and the report highlights specific calls to action to ensure the new Duty changes practices that are contributing to poor outcomes.

This report looks at how using credit to pay for essentials can cause harm, compounds financial difficulty and lowers living standards, as well as how practices in the credit market and design of products similarly drives harms caused by safety net borrowing.

The study

The study was commissioned by StepChange, a leading UK free debt advice charity. It explores the extent to which credit is being used as a safety net.
The findings are drawn from:

• A large-scale research study, carried out online by YouGov Plc, between 20th - 24th October 2021. It achieved a total sample size of 5,028. Data have been weighted and are representative of GB adults (aged 18+).
• An online survey of clients who first contacted StepChange during 2021. The survey was sent to a representative sample of clients and achieved 550 responses.
• Contextual data from several other relevant and recent sources on credit use, including the FCA’s Financial Lives 200 survey.

Key findings

• The study estimates that in 2020, 9% of adults (4.4 million people) struggled to keep up with household bills and credit commitments and borrowed £13 billion.
• The study found that using credit to pay for essentials causes harm, compounds financial difficulty and lowers living standards:
  • (71%) of those using credit as a safety net reported a negative impact on their health, relationships or ability to work, five times the proportion of others who hold credit products (15%).
  • Two-thirds (65%) of those using credit as a safety net had kept up with credit repayments by recently missing housing or utility bills, using more credit or cutting back to the point of hardship. This compares to one in ten (12%) among others who hold credit products.
  • Those most exposed to problems were groups with low financial resilience including parents with dependent children, renters and those with additional vulnerabilities such as health conditions.
• The study also found that more than half of GB adults (53%) said that they would be reluctant to seek help with financial difficulty from a bank or credit firm due to low trust in firms to act in their interest, worries about credit reporting and embarrassment and stigma talking about financial difficulty.
• The study notes that practices in the credit market and design characteristics of products can drive harms caused by safety net borrowing. These include:
  • Credit products being marketed and widely available to consumers in financial difficulty.
  • Ineffective creditworthiness and affordability assessments that enable consumers to take on products that are not suitable for them.
  • Poor product design, such as automatic credit limit increases, that can lead consumers to take on more debt.

Recommendations:

1. Action to tackle products and practices that cause or compound financial difficulty
2. Effective early intervention and support for consumers in financial difficulty
3. Action to join up regulatory and social policy to provide safe alternatives to harmful safety net credit.

Points to consider

• Methodological strengths/weaknesses: The commissioned survey has a large sample size, representative of (and weighted to) the UK adult population, which gives confidence that these findings are robust. It should be noted that there is less detail on the methodology of the survey of customers, and we cannot be confident that it is representative of this group.
• Generalisability/ transferability: This report is of significant interest to politicians, policymakers and credit providers who are interested in the prevalence and impact of the use of short-term credit for essential expenditure within the UK.
• Relevance: The findings are situated in a UK context, though some of the learnings may be transferrable to countries.