Millions are relying on credit as a safety net — for many the price is deepening debt problems

By Adam Butler, Public Policy Manager at StepChange Debt Charity

Amid rising living costs, credit is a risky safety net but there are solutions to make the market safer

Our latest research looks at the experience of the four and a half million people struggling to keep up with essentials who are using credit to pay bills or credit repayments and make it through to payday.

This type of ‘survival borrowing’ often leads to problems:

• Two-thirds (65%) of this group say they keep up with credit repayments by missing bills, borrowing from family or friends, or cutting back to the point of hardship.
• 71% say credit has a negative impact on their health, relationships or ability to work.
• 51% are struggling with serious problem debt.

By comparison, very few of those using credit but not survival borrowing report these problems.

Harm caused by safety net borrowing stems from a number of issues. Credit products are marketed and widely available to consumers in financial difficulty, but are often not suitable for those who are struggling. Creditworthiness and affordability checks, however, are not effectively preventing unsustainable borrowing.

Product design, particularly in revolving credit such as credit cards and online retail credit, can also compound financial difficulty through automatic credit limit increases that lead to steadily rising balances and long-term debt servicing costs.

“Despite contacting all of my creditors, none of them offered to help me. One of my creditors renewed a credit card that I’d previously paid off without me asking them to, and I became reliant on it to pay for my living expenses. For a year, I was stuck paying off the minimum each month and feeling increasingly anxious about my situation.”
Marianne, StepChange advice client

Worryingly, consumers often do not believe that they have a safe way out of repayment difficulty. Rather, when borrowers are unable to repay with existing credit repayments, they often borrow further to keep up (or take other coping actions that make the situation worse) instead of asking for help from a bank or firm.

Why is this? Over half of GB adults say they would be reluctant to ask for help from a bank or firm if they were in financial difficulty.

In fact, reluctance to reach out for help increases among those in financial difficulty. Concerns include fears that a creditor will not help (or will make the situation worse), anxiety about negative credit reporting and embarrassment or stigma talking about financial problems.

The result is that many people struggling with credit repayments fall further into difficulty instead of getting the support they need: in a recent survey of Stepchange clients, over half had been in financial difficulty for more than a year before they accessed free debt advice.

“I wish that the [firms] took more responsibility when they can clearly see that their customers are struggling to keep up. My creditors never offered to help and they didn’t signpost me towards support elsewhere. It’s far too easy to get hold of more credit when you’re already at crisis stage.”
Dean, StepChange advice client

In the right circumstances, credit is socially and economically useful. But when households experience difficult times, credit is too often making the situation worse.

We have highlighted three changes that would help to address harm caused by the credit safety net:

• First, the new ‘Consumer Duty’ announced by the Financial Conduct Authority (FCA), which is currently under consultation, will require firms to ‘act to deliver good outcomes for customers’. Credit providers must respond with real change in practices that are causing harm, such as ineffective affordability checks and product design that exploits behavioural bias and vulnerability among consumers in financial difficulty
• Second, consumers must not only have, but be aware that they have, safe and fair options when they encounter financial difficulty. Pandemic payment deferrals demonstrated that a visible and attractive offer will be taken up by customers who need it. The FCA should now mandate firms to provide a clear, transparent and readily understandable offer to customers that acts as gateway into tailored support and, where appropriate, free debt advice.
• Finally, one in four UK adults has low financial resilience to cope with lumpy expenditure and life events that cause income and expenditure shocks. Households with low financial resilience need better options so they do not have to rely on harmful safety net credit.

A good start would be to turn commonly articulated aspirations to promote financial inclusion into a concrete strategy. That means identifying the needs of vulnerable and financial excluded consumers that are not being, or cannot be, safely met by the credit market and investing in alternatives such as grants within the social security system and no- or low-interest credit.

Ultimately, to prevent the social harms caused by survival borrowing, the needs of financially vulnerable households must be met outside the credit market, or the market must be safe for those who are struggling. At present neither of those conditions is being met.