When the dust settles after yet more election confusion, these are the solutions the new government needs to focus on to help people in problem debt, says chief executive of StepChange Debt Charity Mike O’Connor.
What should the new government prioritise in its first 100 days? Household debt may not make it to the top of the pile, indeed some will argue that we depend on consumer borrowing for growth. But problem debt and its causes underpin many of the economic and social issues the new government needs to confront.
Around 2.9 million people are struggling with severe debt problems with more than nine million showing signs of financial distress. Problem debt doesn’t just blight the lives of individuals. It also harms families and communities, draining the UK economy of an estimated £8.3bn.
Unsecured debt levels are rising among our clients for the first time since 2008. As inflation increases, the Bank of England is predicting a squeeze on household income growth this year. With consumer lending approaching pre-crash heights, stagnant wages and inflation, increasing numbers of households are likely to find themselves in problem debt.
Both major parties made a manifesto commitment to breathing space – something we have been trying to secure for several years. Our proposal would give people who engage with debt advice a period of up to a year to recover their finances by halting enforcement action and freezing interest and charges. This would stop their financial situation deteriorating further and give them time to get back on their feet. Founder of moneysavingexpert.com Martin Lewis, who regularly supported calls for the scheme, described it as “a win for the individual, a win for the state and a win for creditors.”
We would like to see the new government act on other key drivers of problem debt.
A better alternative
Despite stronger regulation of payday lending and support for the growth of credit unions, there are still 1.1 million people having to use high-cost credit to keep up with the cost of everyday essentials like food, rent and household bills.
The scale of alternative lending is still limited and the availability of no-interest loans and grants for the most financially excluded has reduced through cuts to the Social Fund and a local welfare system facing serious funding constraints.
Policy action to tackle the harm caused by payday loans is welcome. But there are other high-cost products still causing harm to struggling households. Charges for unauthorised overdrafts can be more expensive than a payday loan. Rent-to-own agreements can see hard-pressed households pay more than double for household goods.
Logbook loan borrowers can end up repaying substantial amounts and still see their car taken away. The government needs to address the harm caused by high-cost credit used by financially vulnerable.
Create a saving culture
Our research found that 14 million people had an income shock in the past year and those who had income shocks account for almost three quarters of people in severe problem debt. Yet 14.5 million people do not have enough to put anything aside for the rainy day savings that could help protect them against shocks. If every family had £1,000 saved for a rainy day, our research shows half a million families would be protected from falling into problem debt. We welcomed the Help to Save scheme for people on working tax credit and Universal Credit to build a savings buffer.
Public sector creditors
In a 2016 survey, our clients said that public sector creditors were most likely to treat them unfairly. Half of respondents said they had been treated unfairly by bailiffs (collecting mainly government and local government debt). More than 40 percent said they were treated badly by a local authority creditor and HMRC debt collection practices were rated no better than payday lenders.
We know that unfair creditor practices can drive people further into debt. Six in 10 of those people who did not get the help they needed from their creditors went on to take out more credit to try to cope with their debt problems, while 29 percent said that a creditor’s actions prompted them to fall behind on other bills.