Credit is a valuable and sometimes essential tool for managing finances. However, the 2018 UK Adult Financial Capability survey found that nine million adults use credit to pay for food and bills because they have run out of money, indicating that a large number of UK adults rely on credit to make ends meet.
Compounding this problem, many people pay more than they need to for credit, for example over three million ‘financially squeezed’ adults are paying more for credit by only making low (including minimum) repayments. The costs of mounting credit balances can prevent households from building a savings buffer, resulting in a vicious cycle of borrowing, as unexpected bills lead to further need for credit.
This review brings together evidence which shows who becomes over-reliant on credit and why, how to identify people at risk, and which solutions are most effective.
Anyone can fall into the trap of borrowing more than they can afford, but research shows that the following demographic groups are more at risk of becoming reliant on credit than others. Further work is needed to understand why these groups are more at risk, as well as the role of other compounding factors, for example that women are more likely to be in lower paid work, or to be single parents.
Income is an important but complex factor. Money and Pensions Service market segmentation found that 18% of ‘struggling’ households, 21% of ‘squeezed’ households, and 15% of ‘cushioned’ households say they regularly use credit for food and bills, because they have run out of money. Low-income households are less likely to have a savings buffer and more likely to use expensive forms of credit, but they also tend to exhibit better credit management behaviour (such as having lower credit balances, or paying more than the minimum payment), than middle- and high-income households. Understanding disposable income (which takes into account the additional costs faced by different types of households e.g. those with having children), rather than income alone, may be more useful in identifying at risk groups across the income spectrum.
Although young adults are less likely to be struggling with credit than 25-34 year olds, participants in several studies trace their financial difficulties back to unsolicited offers of loans, credit cards and overdrafts in their late teens and early twenties.
Among young adults, young women are particularly at risk. Young women are more likely to have used some form of credit or loan in the last 12 months and hold higher credit card debts. Women in all age groups are also more likely to use more expensive forms of credit than their male peers.
Households where the youngest child is 3-14 years old are more likely to use credit to pay for food and bills, and single parent households are more likely to use expensive forms of credit, such as home-collected credit.
Multiple studies have shown that people with disabilities or long-term illnesses often face higher living costs and greater barriers to employment, weakening their ability to develop savings and increasing their potential need for credit. In addition, a Money and Mental Health Policy Institute (MMHPI) survey of nearly 5,500 people with mental health problems found that 59% had taken out a loan when unwell which they wouldn’t otherwise have taken out.
There are several factors which encourage credit use – both external, such as income pressures and emergencies, and internal, such as individual psychology:
Combinations of these internal and external factors may, over time, normalise borrowing habits and increase credit balances beyond an affordable level.
Typically, people do not seek support with credit until they reach crisis stage. Therefore, spotting the signs that someone is at risk, and directing them to help, is a challenging but crucial first step to supporting people who are over-reliant on credit. Certain behaviours or patterns of credit use are indicative of problematic borrowing and may be signs that a person needs help:
When dealing with high, unmanageable levels of debt, specialist debt advice is the most appropriate support for beneficiaries. However, for people who are starting to depend on credit to make ends meet, but are not yet in need of debt advice, evidence suggests the following approaches can be effective:
Community Development Financial Institutions (CDFIs), Credit Unions and affordable rent-to-own providers can help to reduce the cost of borrowing for small financial emergencies. An evaluation of the affordable rent-to-own provider Fair For You showed that their users save money, are at less risk of increasing debt, and experience better wellbeing compared to users of higher cost rent-to-own stores. However, these options are not always accessible to people who are struggling with credit, and don’t always meet their needs. Credit Unions for example often only lend to members who have saved with them in the past and typically do not transfer funds as quickly as high cost lenders.
Supporting people to manage large, infrequent costs can help them to avoid high-cost credit. An evaluation of the Supported Rent Flexibility pilot, run by the Centre for Responsible Credit with Optivo Housing Association, found that enabling people to under-pay their rent in more expensive or leaner months reduced rent arrears and use of credit for essential spending, and improved wellbeing.
Research by StepChange and the University of Bristol found that after taking out consolidation loans, people typically did not change their spending behaviours and therefore their credit balances continued to rise. Tackling deep-rooted borrowing and spending habits is also essential to tackling credit use. This is too big a question to tackle in this review, but the following two examples from the Financial Capability Lab demonstrate the use of behaviourally-informed interventions to target credit use and repayment behaviour:
Questions for future research include:
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This Thematic Review was produced in collaboration with the Centre on Household Assets and Savings Management (CHASM) at Birmingham University, the University of Edinburgh Business School, Toynbee Hall and Ecorys UK.