The desperate measures of using credit in a crisis

31st January 2017

Where would you turn if you did not have enough money to pay for your household bills or debts? A Christians Against Poverty (CAP) survey of 1,200 clients has found that 91% had used some form of credit to pay a bill or debt. The figures show that for the vast majority struggling with debt, credit is the initial unsustainable solution they quickly turn to.

The survey sought to identify the types of credit used to pay essential bills and debt when in financial crisis. It clearly exemplifies how debts spiral as financial difficulty emanates. While friends and family are turned to most frequently, credit cards and overdrafts also made the top three, used by over half of those surveyed (58% had used credit cards and 50% overdrafts).

It is interesting to note that despite the intense scrutiny, in general high-cost short-term credit (HCSTC), such as payday loans, are used much less than sources of ‘rolling credit’. Only 18% had used a payday loan, compared with 58% who had used credit cards. This goes to show the importance of the inclusion of other sources of high-cost credit in the FCA’s current consultation.

As credit cards and overdrafts are ‘rolling credit’, accessing them often requires minimal proactivity at the point of crisis. When relied upon over the longer term, they can quickly become unsustainable, sending individuals and households over the edge, spiralling into extensive problem debt. Overdrafts in particular can pose problems when used for essential bills to the point income is not enough to move back into the black.

In contrast to the overall findings, payday loans made the top three sources of credit for those in the younger generation (18-25). Only 5% of those over 65 had resorted to payday lenders, as opposed to 42% of 18-25s. This is likely to reflect several factors, including a preference for convenient online services and lacking access to other sources of credit due to non-existent credit ratings. Taking out HCSTC can often decrease a credit score further and so the situation becomes a catch-22.

Of those who had used credit to pay a bill or debt, three in five (58%) had asked friends and family. It was more common, however, for friends and family to help pay for rent/mortgage or food, as opposed to household bills and other debts. Only 36% had asked friends and family to help pay for other debts, contrasted with 58% who had asked for help with food. The results showed there is a clear pattern of specific bills and debts that people are prepared to ask for help with from friends and family. Initially friends and family may appear the easy option, however, if repayment terms are not agreed or met, owing money to friends and family can sadly affect the very same relationships you would usually go to in times of stress.

At times, credit can be a lifeline in crisis moments, allowing a family to remain in their home or put food in the cupboards. Yet, if households begin to rely on credit to pay for essentials it quickly becomes unsustainable. These figures show just how prevalently credit is used as a crutch. It can exacerbate a small debt problem into an unmanageable situation and implicate the lives of all involved. This is why CAP encourages anyone in debt to ask for help sooner rather than later.     

Kiri Saunders, External Affairs, Christians Against Poverty (CAP)