New research by StepChange estimates that 1.4 million lower-income households resorted to high-cost credit to meet day to day living costs last year – up from 1.1 million households in 2016. The charity’s new research now identifies three distinct groups of those living on lower incomes in the UK, and how alternatives could be developed to reduce the reliance of each on high-cost credit.

With the Government and the Financial Conduct Authority now recognising that better alternatives are needed, the time has come to develop solutions. The new segmentation study points out that, among the 19 million people on lower incomes in the UK, it would be a mistake to aim for a “one size” solution. Disparate households have different needs and a varying level of capacity to repay the credit.

Using the Joseph Rowntree Foundation’s Minimum Income Standard (MIS) as a benchmark, these can be categorised as:

  • An estimated 8 million people living just below the Minimum Income Standard (75% of MIS or more)
  • Around 11 million people living on less than 75% of the Minimum Income Standard (which broadly correlates to the official poverty line, of 60% of median income)
  • Within these, around 1.25 million people on such low incomes that they are living in “destitution” without the income necessary to meet basic needs on a regular basis.

The new research points to the different solutions that could be appropriate for each of these groups. For the eight million living just below the MIS, credit unions and community lenders offer a potential credit solution. The challenge with this group is to increase the scale and reach of the finance providers, so that there is enough capacity to meet the need.

For some of the eleven million on 75% or less of the MIS, the analysis suggests that scope exists to design an affordable loan scheme which could be feasible if the loans were ultra-low or no-cost, and structured to allow for flexible repayments. Schemes such as the Good Shepherd No-interest Loan Scheme, a joint initiative in Australia between the Australian Government and National Australia Bank, delivered through local providers, demonstrates that ultra-low cost credit provision is possible. The UK Government should actively explore introducing a similar scheme.

Finally, for the million or so households whose income levels are so low that no form of repayable credit is realistic, StepChange Debt Charity argues that grants and support services need to be made more widely available, through increased and more secure funding for local welfare provision.

In a blog published today to coincide with the research report Grace Brownfield, senior public policy advocate at StepChange Debt Charity, wrote “We must undoubtedly keep expanding the provision of credit unions and similar, but we need to look beyond this too. The Government and the FCA need to look creatively at working with businesses to provide low- and no-interest loans, learning from successful schemes in Australia and elsewhere, while recognising the need for the welfare system to provide better emergency support for those who need it. Such an approach could truly transform the options available to those on low incomes and break the vicious debt spiral that high cost credit all too often creates.”