Millions using credit as a '˜safety net'

StepChange said that gaps in the availability of affordable and sustainable credit, harmful features in mainstream credit products and a lack of financial resilience are leaving many families vulnerable to the credit safety net - and leaving them trapped in a “downward spiral” of borrowing.

Major research by the Leeds-based charity found many households struggle to meet emergency costs and special one-off purchases, with an estimated 13m saying they would need to borrow to cover unexpected bills, and a further 19m saying they’d struggle to save for a special purpose or occasion.

It spoke to more than 3,000 people, of which 8 per cent, the equivalent of four million Britons, were found to be using credit as an everyday safety net for bills, emergencies and one-off costs.

These people met three criteria - they had borrowed at least occasionally in the last year to pay essential household bills, they would find it hard to raise £200 to £300 in an emergency without borrowing the cash and that they would find it hard to save £500 for a special purpose.

Around a quarter of those estimated to be using credit as a safety net are from the most “financially excluded” groups, the charity said, meaning they can find it harder to access mainstream lending products. People in this group may include those on low incomes, in casual work, on state pensions and those who are unemployed.

The charity suggested that a “micro loan” scheme, similar to one used in Australia to provide low income households with no-interest loans, should be set up by the Government and banks. More should also be done to encourage people to build up a “rainy day” savings pot - possibly by adapting the automatic enrolment scheme for workplace pensions.

Among those using credit as a safety net, credit cards and overdrafts were found to be the most common types of debt.

StepChange said while many people find these products useful, some can get into more entrenched financial difficulty, with “complex and costly” default fees charged to those who miss repayments.

The charity urged the Financial Conduct Authority (FCA) to ensure that rules around these products meet the needs of vulnerable borrowers whose circumstances are prone to change. There are also problems around people being able to take out multiple credit cards and digging themselves further into debt, the charity said.

Credit agreements which allow minimum repayments to be made can also turn short-term credit products into long-term and costly forms of borrowing, the charity said.

Mike O’Connor, chief executive of StepChange, said: “We campaigned hard for the reform of the payday loan sector, but it is not enough just to stamp out bad practice. People will continue to need credit, but they need affordable and sustainable options they can turn to in times of difficulty.

“The truth is though that sometimes more credit, however safe, is not the answer for people with serious debt problems. We must find alternatives to credit, not just different forms of credit, and provide more support for people to save, especially those on lower incomes.”