According to the The Institute for Fiscal Studies (IFS), unsecured borrowing in the UK has risen by ten per cent in the last year, with households in the lowest income bracket hit hardest.
There can be little doubt that the UK is in the grip of a debt crisis. Unsecured borrowing (such as credit cards and overdrafts) could exceed £19,000 per household by the end of 2022.
Debt is an especially big problem for those living on little income because it’s littered with complications. Sixty-three per cent of the people Christians Against Poverty (CAP) help lived below the poverty line before seeking assistance, while 42 per cent rely solely on benefits as their source of income.
One ongoing concern is that many households – particularly those on a low income – don’t have any savings to fall back on. A massive 92 per cent of CAP clients had no savings buffer whatsoever to withstand financial shocks before they approached them.
You can imagine the implications for those living solely on benefits if their payment was to be withheld. How will they put food on the table for their families? How will they afford the transport to the Jobcentre to make sure they receive their next benefit payment? How will they make that debt repayment they’re being hassled for daily?
CAP is keen to help build financial capability, part of which is stressing the importance of building up a bank of savings. Their Freedom report, which surveyed 214 former CAP clients two years after becoming debt free, found that there was a threefold increase in the amount of clients with savings, and that 38 per cent had managed to save over £1,000.
Then there’s what’s known as the ‘poverty premium’, which refers to low income families tending to pay more for the credit they use. Many low income families use prepayment meters (PPMs) to pay for their energy and often find themselves facing higher tariffs and charges. According to CAP’s research, those on PPMs were paying up to £250 extra per year than monthly Direct Debit customers with the same supplier. There is also an alarming rate of self-rationing amongst users. Of those surveyed, 57 per cent said they were limiting their energy use, 29 per cent were doing so severely, and 8 per cent did not use their heating at all during the winter months.
CAP believes there needs to be more affordable borrowing available, drawing upon the example of a ‘No Interest Loan Scheme’ practised in Australia. Described as providing “individuals and families on low incomes with access to safe, fair and affordable credit”, the loans are available for essentials, household items and medical needs, with affordable repayments. Of course, something like this would need serious government support to be rolled out across the UK.
In the meantime, CAP has been working with a leading energy provider and can now offer emergency fuel vouchers to clients who are customers with them, should they suffer an energy crisis. This is a significant step in the right direction due to CAP’s work within the energy industry.
Anything that can be done to support low income families, especially those on benefits, is welcome.
CAP is also beginning to see positive results from the relationships built within the credit industry and the government. In 2017, we inputted into a consultation by the Financial Conduct Authority (FCA) around proposed changes to their guidelines on assessing creditworthiness in consumer credit. The FCA is now encouraging lenders to also consider the borrower’s situation and the impact unaffordable credit could have on them.
CAP played a key role in the government adding a policy to their 2017 election manifesto on a breathing space scheme, whereby people in debt would be allowed six weeks of respite in which to seek help. CAP is now calling for the proposed six-week period to be extended as, from experience of the multi-complex circumstances facing our clients, this isn’t long enough. We’re also calling for priority debts (such as mortgages and Council Tax) to be included in the scheme as well, as these make up a third of all debt in the UK.
Anything that can be done to support low income families, especially those on benefits, is welcome. And although we know it can be hard to get by, support is available. Encouragingly, after CAP’s help, despite still living on low incomes, 93 per cent of clients remain free of problem debt.
Gemma Pask works for Christians Against Poverty UK (CAP) - a charity determined to reduce hardship in the UK, through the local church. It does this through 624 poverty fighting services, including debt centres, job clubs, release groups and life skills groups, helping people develop basic financial and practical skills. Find out more at capuk.org.