Affordable credit

A lack of access to credit that is affordable puts many households at risk of becoming trapped in a cycle of debt. We want to ensure that households are not forced to pay a premium for credit because there is a lack of affordable credit products that suit their needs.

The level of unsecured consumer credit has tripled over the last 20 years and UK households have an average of £6,625 of consumer credit debt. In today’s economic climate, credit use is not solely about purchasing consumer and luxury goods; but rather the rising costs and increase in irregular or insecure employment has squeezed household incomes and forced millions of households to rely on credit to make ends meet.

Many households on low incomes are excluded from accessing cheaper forms of mainstream credit.  To meet their credit needs, they must use high-cost alternatives such as payday lenders, home credit providers, pawnbrokers, hire purchase and catalogue credit, or illegal lenders.

Research estimates that 2 million people took out a high-cost loan in 2012 as they were unable to access any other form of credit.  All forms of credit come with some risk, but those without mainstream credit options are often at the greatest risk of experiencing financial difficulty.

Having access to affordable credit helps households smooth expenditure in the event of an unforeseen circumstance or emergency, but a lack of transparency about fees and charges, the high costs associated with some forms of credit, and poor practices on the part of credit providers puts many low-income households at risk of over indebtedness.

Since the Financial Conduct Authority took over the regulation of consumer credit in 2014, action has been taken to tackle some of the most pernicious aspects of the credit market.  Changes to the payday lending regulations established a cap on the total cost of lending in the high-cost short term credit market.  New rules for firms also mean that creditors must take more responsibility to ensure customers do not take on credit they can’t afford.

Another crucial area to address is the inefficiencies in the credit referencing models, which fail to capture meaningful data about certain consumers.  There are an increasing number of consumers who have thin credit files or leave very few digital financial footprints.  Younger consumers, for example, are less likely to live at a fixed address or have utility bills in their name while consumers on lower incomes may avoid credit through fear of debt and/or manage their money in cash. The problem cannot be simply defined as one of risk, but rather one of information. Increasing the range of data gathered is one option (such as including rent payments to demonstrate an ability to honour financial commitments), but there first needs to be a thorough review of how credit referencing agencies and their institutional clients collect, analyse and use data in a way which essentially disengages and disempowers consumers.

We continue to work with the Financial Conduct Authority, consumer credit trade associations, and other stakeholders to:

  • ensure that borrowers are protected from irresponsible lending
  • encourage consumers’ engagement with and ownership over their own data to enable a better picture of a consumer’s ability to pay
  • engage in discussion with the sector regarding what types of data are appropriate for credit scoring
  • ensure that consumers in financial difficulty are given the chance to get themselves back in control of their money
  • ensure that credit providers have systems in place to identify people struggling to make payments and refer to free debt advice services
  • monitor the impact of regulations on high cost credit
  • advocate for a supportive regulatory framework for alternative affordable credit providers like credit unions and community development finance institutions
  • support initiatives which ensure fees and charges related to borrowing are clear and transparent so that consumers can easily compare and make informed choices

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