Over one million people in the UK use high-cost credit to pay for household essentials, according to research from debt charity StepChange.
Nearly half (49%) of those who use high cost credit do so to pay for food and grocery shopping. A third use credit cards to pay for fuel and water bills, and a quarter use high cost credit to cover other housing costs.
Those on lower incomes who struggle to meet the costs of day-to-day essentials, also resort to high-cost credit when an emergency or large purchase is unavoidable.
But StepChange warns that the credit products currently available pose a significant risk of trapping borrowers in a persistent cycle of debt.
Its report found that those who use high-cost credit do so due to the ease of access to products such as home credit – a type of doorstep lending, payday loans and rent-to-own, and because of a lack of knowledge about mainstream options such as overdrafts, bank loans, and credit cards. Many households held the expectation that being on a low income or having a poor credit rating prevented them from accessing cheaper finance.
That said, nearly half of the 1.1 million using high-cost credit to pay for household essentials were already financially excluded from access to mainstream products due to either an adverse credit history, or due to having little history at all.
‘Government action needed’
StepChange is calling on the government to create new credit options for borrowers excluded from mainstream lending.
Laura Rodrigues, senior public policy advocate at StepChange, comments: “Without significant support from government in the form of a renewed Social Fund or through the provision of major capital backing for a no interest loan scheme, financially vulnerable households who need to borrow will still be left with financial products which don’t serve their needs and risk pushing them deeper into hardship.
“The expansion of the community lending sector and expanded provision by mainstream lenders would all be welcome and needed steps. However, the gap between supply and demand means that what’s needed are bold and innovative ideas.”