Personal debt defaults almost double in a month

The number of people missing credit card or loan payments is soaring

An estimated 12 million adults had low financial resilience after the first lockdown

Almost 800,000 people failed to meet their credit or loan obligations in October, with the number of people missing payments up by around 370,000 in the last month.  

The sharpest rise in missed payments since the start of the pandemic, Which? research suggests almost 6 per cent of the UK households defaulted on at least one housing, credit card, loan or bill payment in October, up from just under 4 per cent the previous month.  

A missed payment is widely acknowledged by the financial services industry as an indicator of significant financial difficulty and is regularly used as a key criterion for future lending decisions.  

The Financial Conduct Authority (FCA) which regulates the financial services industry found that by July this year, after the end of the first full lockdown across the UK, 12 million adults had low financial resilience.  

Financial resilience is the term used to describe the ability to absorb financial shocks like a sudden loss of income or a large unexpected bill by falling back on existing assets such as cash savings.

Already at a high rate before the pandemic hit, the number of people unable to meet essential living costs if hit by a financial shock has increased by 2 million since February this year.

Financial shock

A third of adults have experienced a decrease in household income since the start of the pandemic official figures have found, with income falling by a quarter on average, despite the government’s pledge to support 80 per cent of employee income – a move widened this week to include most self-employed workers.  

Ethnic minorities and young people are more likely to be affected by a drop in income.

The data point to dramatic changes in personal financial and employment circumstances as businesses and individuals anticipated the scaling back of state-funded financial support measures.  

Those measures have now been extended in response to the new lockdown across England from Thursday, while Wales, Northern Ireland and Scotland are already enduring significant restrictions.  

But the figures also come on top of any Covid-related payment breaks borrowers have already arranged with lenders, including mortgage, credit card loan and even short term credit arrangements like payday lending and buy now pay later.

And separate data from debt app Freeze Debt found that although half the UK population now uses “buy now pay later” products like Klarna and Clearpay, most consumers don’t regard money owed to these services as “real” debt.

Breathing space

The FCA has this week announced plans to extend the debt payment break window available to a six-month maximum in light of the second lockdown in England.  

But even if the additional injection of support does lead to a drop in these default figures in the short-term, consumer groups warn the cliff edge is still out there and is currently due to make its presence felt before Christmas.  

The Job Support Scheme, which was due to start over the weekend and sees government funding fall back compared with the furlough or Job Retention Scheme, will kick in as the newly extended furlough scheme and the English lockdown end – set, as things stand, for 2 December.  

No response

A fifth of UK mortgage holders have contacted, or attempted to contact, their lender since the start of the pandemic, most to arrange a mortgage payment deferral. But more than half have struggled with long wait times or no responses to email or phone messages, Which? recently found.  

The FCA had planned to introduce new rules on 1 November that meant lenders would have to carry out assessments of individual circumstances in order to provide support, rather than consumers being able to self-report their financial difficulty. 

Critics had warned the move would have created a huge backlog by complicating the process at a time when more people needed help as state support ended.

In light of the new lockdown, lenders are now being asked by the FCA to use their discretion around requests for help based on individual circumstances where other options may suit them better – not least because deferrals still accumulate interest charges, increasing the overall cost of the borrowing.

And while payment holidays are currently not marked on credit files due to the exceptional circumstances, that was also due to be revoked from 1 November, meaning that payment breaks would then be reported as missed payments as usual – potentially affecting the customer’s credit report for many years.

These plans too have been put on hold, but they will be reinstated eventually.

Getting help

Those facing problem debts are being urged to seek impartial advice from sources including the Money and Pensions Service, Citizens Advice, and charities such as StepChange.

StepChange, for example, can help those with problems debt create a manageable debt repayment plan with creditors.  

The charity recently announced plans, due to go live in mid-November – for a Covid Payment Plan (CVPP) aimed at those who “just need a bit more time and a bit more forbearance” to get back to resuming full payments on debts built up during the pandemic – particularly those 2 million people newly facing low financial resilience.

The charity acknowledges the new plan is just one piece in the jigsaw of measures needed – specifically aimed at those expecting to face only short-term difficulty.

“Other debt solutions remain more appropriate for those in more severe difficulty that is unlikely to be resolved quickly, and public policy has an increasing role to play in targeting more support to those in greatest need.”