From debt trap to helping hand: preventing harmful financial difficulties journeys in consumer credit

By Adam Butler, Public Policy Manager

Our new infographic shows how using credit to cope with living costs often draws people into difficulty — there are solutions to prevent harm and poor outcomes.

StepChange’s new infographic can be found in full here.

Cost of living pressures mean that almost one in five UK adults (17%) who find it difficult to keep up with bills and credit commitments are using credit to help pay for essentials like groceries, utilities and housing.

Using credit to keep up with living costs is a significant risk factor in developing debt problems: as people struggling with living costs borrow more, credit repayments further reduce their income, compounding the problem and leading to more borrowing.

At the beginning of May, we estimate that four million people had been stuck in financial difficulty for over six months: that means they have not been able to keep up with credit repayments without taking negative coping actions like rationing essentials. Almost three million had been struggling for over a year.

These long-term financial difficulties have serious negative impacts: eight in ten (82%) of those struggling to keep up with credit repayments say debt has a negative impact on their physical or mental health, and half (50%) on their relationships.

Consumer credit can help people to budget and manage expenses but is not working safely for those struggling with living costs. Here are five ways the regulator, industry and government can help:

1. The FCA should make preventing harmful financial difficulties journeys a key priority for the Consumer Duty

The Consumer Duty marked a welcome shift in expectations of practice and culture in financial services. But if the Duty is to have real impact, it must ultimately change outcomes among consumers exposed to harm.

Poor outcomes for customers struggling with living costs are too easily framed as a consequence of their difficult circumstances: in reality, norms and practices in the credit market contribute significantly and draw people into difficulty.

It is not a coincidence that credit cards, where lending rules are framed permissively and the structure of products tends to lead to increasing balances, are the most common product held by those who are struggling. People value the flexibility these products provide but there needs to be a better approach to achieve the right balance between access to credit and preventing avoidable serious debt problems.

The FCA should ensure it is using a holistic understanding of poor outcomes in credit to drive its Consumer Duty agenda: this must include taking a hard look at rules and market practices that are the biggest drivers of poor outcomes.

2. Credit information reforms should remove barriers to people in difficulty seeking help

Credit information is not working well enough to prevent financial difficulty. Consumers are fearful of the negative credit reporting impacts of seeking help to the point that it is not always clear the positive impacts of transparent reporting outweigh the negative impacts of these worries.

Following its credit information market study, the FCA has asked the credit industry to take forward some important reforms like introducing more flexible forbearance reporting so that people able to agree a new repayment plan are not treated overly punitively.

But this step alone will not address barriers to people in difficulty reaching out for help. As credit information reforms are taken forward, including new governance arrangements, a deeper rethink of reporting arrangements is needed to achieve the right balance and give struggling consumers better incentives to seek support.

3. Consumer Credit Act (CCA) reform should address harmful debt communications

StepChange research with clients has shown that creditor communications too often push people away from support due to problems such as a lack of empathy and legalistic or formal language perceived to be threatening.

Moreover, people struggling with multiple debts are often bombarded by letters, emails, texts, notifications and phone calls, contributing to a sense of being overwhelmed and unable to cope.

The Government proposes to use CCA reform to pass responsibility for the form of statutory debt communications to the FCA: this is a vital opportunity to ensure collections communications do a better job at encouraging people to seek help.

But CCA reform will take a while, so right now the FCA can build on the welcome changes it has made to require firms to proactively identify and support borrowers in difficulty by addressing poor practice like excessive contact and setting an expectation that firms will test, monitor and continuously improve their approach.

4. The Government should urgently regulate interest-free buy-now-pay-later (BNPL)

Deferred payment BNPL is now the third most common form of credit used to help pay for essentials, after credit cards and overdrafts. A majority of people with BNPL debt also have other consumer credit debts, meaning how BNPL firms lend and support struggling customers is vital in preventing and alleviating debt problems.

The evidence is clear that proportionate regulation is needed to protect consumers using BNPL against avoidable harm: it is past time for the Government to bring BNPL within the consumer credit framework.

5. Policy makers should give people struggling with bills and essentials better alternatives to desperation borrowing.

Commercial credit is often not the right answer for people struggling with living costs because it is unaffordable or designed in a way likely to lead to over-indebtedness.

The central limitation of the current suite of alternative credit products is scale. Building on Fair4All’s work, the next government should grow the availability and sustainability of spectrum safe and affordable credit options, including a national No-interest Loan Scheme targeted at those unable to afford interest charges.

Finally, the best alternative to credit for people struggling with bills is often not to borrow at all. The approach to debt collection of suppliers and creditors for the bills people are most likely to struggle with is crucial: StepChange has been working to raise standards of support for those struggling with energy bills, and is campaigning to change legislation to give struggling renters more help to agree affordable repayment plans.

Government must also play its role: binding cross-government debt collection principles are needed to shift poor practices like unaffordable deductions from benefits to repay debts such as overpayments and the hasty escalation of council tax debts to enforcement, which cause hardship and desperation borrowing.

Pulling it all together

Poor outcomes in consumer credit have roots in a number of problems and cannot be prevented with one change. That does not mean, however, that if all of these steps are not taken, nothing will make a difference. Making progress in any of these areas will have a big positive impact on people struggling with living costs.