Consumer credit and consumers in vulnerable circumstances

[Amethyst]

Interesting report out today from the FCA.


To understand more about the experiences of consumers most at risk of unmanageable debt, we have conducted primary research looking at the attitudes towards, and use of, credit for people on the lowest incomes.
What did we look at?

Our research identifies three distinct borrower groups – survival borrowers, lifestyle borrowers, and reluctant borrowers – and explores how these groups use credit and the reasons for doing so. Our research also shows how debts can become unmanageable, and the strategies people use to cope with spiralling debts, showing how unmanageable debt triggers both financial detriment and affects health and wellbeing.

While many of the people we interviewed had low awareness of the help and support available to them, debt advice is effective in helping people get out of unmanageable debt. So helping people get the right advice and solution they need, before debt gets out of control, is vital. As we take over the regulation of this sector, we welcome a broader debate with stakeholders to encourage more people to get access to good quality advice earlier, before they reach crisis point.


Consumer credit and consumers in vulnerable circumstances - DOWNLOAD (or see attached PDF)

Next steps

This work will help us as we engage in discussions with stakeholders, including firms, about consumer outcomes for this market. This includes the work we have already announced in our business plan on tackling risks in high-cost short-term credit, addressing issues with credit cards, overdrafts, and logbook lending, improving financial promotions and improving debt management.
We want firms to look at our findings and consider if they are treating customers in vulnerable circumstances fairly.
Further information

• Consumer credit qualitative research
• Consumer credit

[Amethyst]

Re: Consumer credit and consumers in vulnerable circumstances

The debt trap and debt spiral

Over-borrowing and the debt trap

Our research found that many people exhibit behaviours that can both increase the level of
interest they need to pay and risk over-borrowing, increasing the likelihood of unmanageable
debt occurring.

Many of the people we interviewed were able to service borrowing through meeting minimum
payments, with some believing that meeting minimum payments only meant paying the debt
for longer, rather than also paying more interest.

Other risk factors observed in our research included people missing payments, particularly
on products such as home credit and payday loans, whom respondents felt were more
accommodating to missed payments than more mainstream providers. Similarly to making
minimum payments, our interviewees believed that missing payments would mean they were
paying back their loan for longer, rather than paying back more overall.

This behaviour can lead to a ‘debt trap’, servicing existing debts but unable to pay down any
principle. This can lead to incurring very high credit costs. This trap is prevalent among those
on low incomes, as shown in other research. The Centre for Social Justice estimated there are
790,000 low-income credit card holders habitually making minimum payments on their cards,
with 121,000 making minimum payments for more than three years.

Our research found that these factors are often combined with low visibility of total borrowings,
leading to ‘fragmented borrowing’, with people often having numerous (often small) credit
commitments. Respondents often did not consider or recognise certain forms of credit
as borrowing, and therefore did not have full appreciation of the total level of their credit
commitments, potentially leading to over-borrowing and unmanageable debt occurring.


Debt spiral

For those people in unmanageable debt, there is significant evidence that they can easily be
tipped into a ‘debt spiral’, magnifying problems and leading to financial and non-financial
detriment. While this spiral is not limited to those on low incomes, for reasons explored above,
people on low incomes are less able to cope with income shocks or mounting debts and so are
more likely to enter into this spiral. Those people who are in ‘debt traps’, servicing but unable
to pay off existing debts, are highly likely to be triggered into this sequence of events.