Access to affordable borrowing options vital as UK reliant on credit in run up to Christmas
New research has found that the number of people with debt in the UK has increased by ten percentage points in just six months (64% to 74%), with variable workers, which includes gig workers and freelancers likely to be acutely impacted, alongside young people aged between 18 and 34, according to the latest findings from Credit Kudos’ Borrowing Index.
The research found that the finances of variable workers and young people have been unduly impacted by the pandemic, with four in ten (40%) 18-34 year-olds and almost half (47%) of variable workers saying they have had to borrow more than usual since the start of the pandemic. This compares to the national average of 21%.
The landscape is particularly concerning for variable workers, especially when it comes to levels of debt. In the first iteration of the Borrowing Index in early 2020, only one in ten (10%) variable workers had debts of between £5,000 and £10,000. This figure has now more than doubled to around one in four (23%).
While these groups of society are clearly more in need of financial support to help them get by, they are also most likely to have to turn to higher cost borrowing options, for example unarranged overdrafts. On average 24% of the UK population have used some form of higher-cost, short term credit, but variable workers are more than twice as likely to do so than the rest of the population, at 51%. The figure is also significantly higher among younger generations, at 35% for 18-24 year olds and 30% among 25-34 year olds.
This is perhaps unsurprising, given that 3.6 million, or 40% of 25-34 year olds and around 850,000** variable workers have previously struggled to access mainstream credit. This is an issue that has been exacerbated by COVID, with 78% of lenders saying they implemented a change in their lending policies during the pandemic, in part due to difficulty verifying borrowers’ income and a decision to avoid ‘higher risk’ customers during an uncertain period. When considering that over half (51%) of variable workers and 44% of 25-34 year olds said that COVID had a significant negative impact on their income, it’s clear to see why many struggled to access affordable credit during this time.
It’s crucial that financial service providers are lending responsibly. Having access to the right credit options is a key enabler of financial flexibility, but if people are unable to access mainstream credit – despite being able to afford it – it can leave them with no other option but to turn to higher cost sources of credit. Traditional credit data is based on a narrow view of someone’s financial situation, making it difficult to accurately assess an individual’s ability and willingness to repay. If a person hasn’t taken out credit before, for example, or rents rather than makes regular mortgage repayments, lenders may consider them high risk – even if they have never missed a payment. When you add in the disruptive effects of the pandemic on people’s finances and the growth in non-traditional income patterns as the future of work shifts to more freelancers and flexible roles, the ability to determine someone’s true affordability and creditworthiness becomes even more complex.
Transforming this, Open Banking allows individuals to securely share their financial transaction data, giving their chosen lender a full picture of their affordability and creditworthiness – which enables the lender to make more accurate, informed and responsible decisions.
Freddy Kelly, CEO and co-founder at Credit Kudos, said: “The financial shockwaves of the pandemic will continue to reverberate for years to come, especially for those who were already financially underserved, such as young people and variable workers. For these groups, access to affordable credit is essential, and lenders should be looking for ways to serve these people in a responsible, sustainable way. The implementation of innovations such as Open Banking are helping to tackle these issues and paving the way for a brighter financial future. This use of data is enabling the creation of tools that open up access to affordable credit for more people, allowing lenders to expand their customer base while continuing to put customers first.”