The Covid-19 crisis has seen consumers having to take payment holidays to get them through. Ben Page, CEO of Ipsos MORI and chair of a steering group on credit use, explores which consumers use credit for essentials, how coronavirus has impacted credit use, and how the UK Strategy for Financial Wellbeing is responding.
I was honoured to be invited to chair the Use of Credit Challenge Group, leading a senior group of people from financial services, the affordable credit sector, and the voluntary and debt advice sectors to look at how we can reduce the number of people – currently nine million and rising – who use expensive credit simply to pay everyday bills.
When I agreed to take this role in the UK Strategy for Financial Wellbeing in February, I didn’t realise that I would be developing a response to the UK’s use of credit in a global pandemic. If it wasn’t before, it’s clear now how timely and important this work is.
Before Covid-19: three groups using credit for food and bills
As a researcher, of course I wanted to make sure we understood the diverse group of people using credit for essentials, and Money and Pensions Service (MaPS) insights from their 2018 Financial Capability Survey let us identify three different groups of consumers, not all of whom are on low incomes:
- Overconfident high users of credit: The smallest group, around 22% of the nine million that uses the most forms of credit in this way, includes higher earners who make poor decisions but have high self confidence in their financial numeracy!
- Those relying on overdrafts: A further 37% of consumers on much lower incomes mainly rely on overdraft use. However, as new rules on overdrafts mean that interest rates can typically reach 40%, this group of people could start to struggle much more.
- Low income families: The biggest group is the 42% using more than one form of credit for essentials, who tend to be low income families.
The impact of Covid-19 on credit use
When the Covid-19 crisis hit and millions of people found themselves unable to work, or with reduced or no income, it became clear that our understanding of how people use credit would need to change. The crisis means that while wealthier people are saving more, the poorer you are the more likely you have been to reduce savings or extend credit.
Forbearance and payment holidays
Consumer credit has been a key issue through the pandemic, with firms being required by the regulator, the Financial Conduct Authority, to offer payment ‘holidays’ or freezes on mortgages, credit cards, overdrafts and loans. But like any holiday, these will need paying off. Interest continues to build, and of course it shows up on people’s credit histories, which could make it harder to borrow in future.
The financial impact of Covid-19 has not been the same for everyone – for many professionals it has seen them able to pay off more debts and put more away in savings, whereas anyone in travel, catering, hospitality or related industries will likely see significant falls in income and potentially more reliance on credit.
The virus and its impacts will be long lasting: it took years for the full impact and consequences of the 2008 crash to be clearly visible – and I fear the same is true this time.
How the UK Strategy for Financial Wellbeing is responding
Our Use of Credit Challenge Group has spent a lot of time thinking through the best support for consumers who may return to a ‘new normal’ with much higher monthly loan payments, and in some cases unaffordable levels of debt repayments.
Our discussions have been extensive and wide ranging, considering:
- what banks and lenders might need to do
- what the regulator’s longer-term role should be in protecting consumers in their use of credit, and
- what new financial products consumers might need that could make a difference.
We have also considered whether there are any opportunities to use this exceptional period to engage consumers on their use of credit in the longer term, to think about a national ‘reset’ as patterns of work, spending, commuting and much more are thrown up in the air.
Recommendations for the future of credit use
The work taking forward the UK Strategy for Financial Wellbeing clearly couldn’t continue as originally intended, making final recommendations this summer. Instead, it was agreed that we needed to have an initial focus on supporting people’s financial wellbeing in the likely near-term recession following the Covid-19 crisis. We will then spend time in the autumn to consider the medium to longer-term recommendations to help the 10-year National Goals for the UK’s financial wellbeing.
By October, I will be joining forces with the other Challenge Group chairs looking at different aspects of financial wellbeing to publish our recommendations for the strategy’s response to Covid-19: they have to be as impactful as the crisis itself – or we will have failed.
About the UK Strategy for Financial Wellbeing
The UK Strategy for Financial Wellbeing was published by MaPS in January 2020. It is a 10-year framework to help achieve the vision of
everyone making the most of their money and pensions, with a focus on five key Agendas for Change: encouraging savings; pensions and later life planning; building a financial education for children and young people; making debt advice available to those who need it; and reducing the numbers of people relying on credit to pay for food and bills.
MaPS brought together a range of stakeholders, leaders and experts on each of those areas from across financial services, business, the third sector and academia to consider how to achieve the goals set for each Agenda for Change, as well as for three cross-cutting themes looking at how we can improve financial wellbeing with respect to gender and mental health, and by working through employers. There are 11 Challenge Groups in total considering these aspects.