Long reads

Is the UK in a credit crisis?

Sehrish Alikhan

Sehrish Alikhan

Reporter, Finextra

It should not be a surprise, given that the UK is deep into a cost-of-living crisis with nothing to indicate relief on the horizon, that there is also a credit crisis underway.

Living costs leading to debt burdens

The cost-of-living crisis has increased the prices of household bills including energy and water, as well as inflating prices of housing, groceries, and other necessities. While inflation is no longer at its peak, the prices of food and energy have still jumped over 20% from as little as two years ago. According to Citizens Advice Scotland (CAS), prices are expected to rise again in October this year. With a new government in power as of last week, we can hope for change, but currently the numbers are looking rough as the general population descends further into debt and disarray.

The debt burden that people are now facing has become unfeasible, as more and more of those struggling with the cost of living have turned to loans and credit. Houses at lower income levels are at risk of falling even deeper into debt due to lower savings and debt repayments taking out a chunk of their incomes. Research from health.org also revealed that debt issues is likely to impact health negatively, with people less willing to spend funds on their needs.

The Bank of England report 2023 found that mortgage and consumer credit rates have remained low, however the use of consumer credit in households has increased. The report outlined:

“Consumer credit growth has increased after its pandemic-era contraction, with 12% annual growth in credit card lending in the most recent data and total consumer credit lending rising broadly in line with nominal incomes over the past year. Consumer credit is used across the income spectrum. Recent survey data indicates that 15% of adults reported increasing their borrowing in response to cost-of-living pressures at the end of 2022. However, the stock of outstanding debt as a share of incomes remains a little below pre-pandemic levels at around 12% in 2023 Q1.”

Londoners are suffering

With the increased reliance on credit and inability to dig themselves out of debt, people are blaming banks for unfair practices and credit processes. Data from Fuse revealed that four in ten financially vulnerable people (defined as people who have gone into debt within the last year), equated to 11.5 million people, are forced to turn to credit to manage everyday expenses and a third of them have issues accessing that credit.

The research found that 40% of financially vulnerable people are finding that access to credit has become more difficult since the pandemic. On top of that, 19% of the financially vulnerable surveyed blame banks for their indebted situations.  

Challenges with credit have hit London especially hard, with the general population in the capital facing significant obstacles in their access to credit and inability to pull themselves out of debt.

According to research from earlier this year from BuildMyCreditScore, Londoners are four times more likely to struggle with access to credit when compared to the rest of the UK. The survey revealed that 23% of Londoners have needed to take out additional credit to manage loan repayments, and accessing credit has become more difficult, with 30% finding it harder to access credit products.

The survey further found that 28% of Londoners are in long-term debt due to borrowing money, with nearly half of 18-34 year olds surveyed in the same position (46%). 28% of Londoners also admitted to relying on short-term high-interest lenders in efforts to stay afloat.

These revelations have led to a wave of distress and complaints on credit processes, with more and more of the general public finding the process of accessing credit products unfair, and are unwilling to put themselves at risk of falling into debt to take out credit in order to establish credit scores.

What needs to be done moving forward, is to support and protect borrowers, move towards pushing down cost of living costs, and for financial institutions to offer more personalised and affordable credit products to those struggling with their day-to-day expenses.

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