Friday, 7 January 2011

The real losers

As we draw to the end of this Dealing with your Debt campaign week, we at Zero-credit are stuck by what seems to be an ongoing feud between the free and paid advisers, even between organisations we respect and trust. When charges of inadequacy come from both sides, the real losers are consumers. Lost in the furore that paid services are corrupt or that charities cannot cope, lies the real issue that, despite Credit Action's debt statistics, all we really know are the numbers in debt solutions and seeking advice. We remain dangerously unaware of the extent of undeclared problem debt - those who attempt to cope alone, too stigmatised, stressed or set in their ways to seek support.

Amongst recent research, two studies stand out. The first by R3 in June 2010, Struggling with debts without help, suggests that around two thirds of problem debtors struggle alone. The second, produced for the Money Advice Trust in December 2010, Demand, capacity and need for debt advice in the UK, reports that only one in six of those with unmanageable debts seek advice. Both are reputable organisations, but it doesn't take much to work out that, only six months apart and reporting the same patterns of consumer behaviour, these figures are significantly at odds. The fact that we simply do not know how many are in debt denial is a catastrophe waiting to happen: consumers may not house, clothe and feed themselves when burdened by crippling debts and enterprise cannot trade with a customer base in default. We can forget any hopes of recovery. 

At least a quarter of the UK’s total population struggles with personal debt - Mervyn King even suggested half of all families - but despite substantial growth in the uptake of credit, attitudes to debt remain unchanged. Debtors are stigmatised and excluded, although little more than consumers for whom borrowing has failed. Some may be irresponsible, others simply unfortunate, but common to all are the sheer numbers in similar situations. We persist in pointing the finger, blaming the individual and not the system, regardless of a crisis rooted in irresponsible lending and borrowing - it doesn’t add up. Worse still, it suits the market to blame the poor. Nobody ever pays quite so much, so often and on time, as those ashamed that they can least afford it. Have you considered this could be you?

In the UK, problem debtors are widely reported as having low income and low educational attainment, yet detailed examination of such data as are available indicates assumptions based on scant research. For its High Cost Credit Review of June 2010, the OFT found only 82 out of 7,600 respondents using home credit and mere handfuls taking out other high cost loans. Subsequently, the Consumer Focus report of August 2010 published recommendations from a sample of but 20 Payday borrowers. Widely reported in the media as authoritative government reviews, both refuted the need to ban or cap interest rates on these types of borrowing based on claims of their contribution to financial inclusion. Regrettably, much as we support the campaign to End Legal Loan Sharking, this too misses the point: the vulnerable are a much bigger community than many of us conceive, let alone consider ourselves part of.

Let us be quite clear. It is impossible for such a small proportion of borrowers, especially if they are, as claimed, lower income households also, to generate a market for high cost credit valued at £7.5 billion. There is also significant evidence that, at one in five, the extent of functional illiteracy and innumeracy has remained broadly the same over the last twenty years, whilst levels of debt have not. Indeed, the correlation between debt and education is anything but a foregone conclusion. Financial literacy or rather consumers’ lack of it covers a multitude of sins, not least the inconsistency of terms used to describe expensive credit by government and the finance sector, as they confuse us with euphemisms for exploitation.

Qualitative indicators provide a different view of borrowing and lending. The value of personal debt has not contracted in recession, whereas insolvencies and demand for debt advice soar. Moreover, the proliferation of pawn broking on high streets and the prevalence of payday advertising on prime time TV suggest a middle-income target market, unlikely to have, and more particularly to admit to having, low income or educational attainment. Indeed, fears of normalising the uptake of high cost credit were at the root of much of the controversy surrounding Boris Johnson’s decision to allow payday lender Wonga to subsidise New Year’s Eve transport in London. Amidst squabbles between commercial debt advisers, plagued with charlatans, and charities, which are overstretched, the struggling consumer remains rich pickings for even steeper repayment terms by irresponsible lenders. 

If you want to change the vicious cycle peddling of credit and debt, now is the time to join our co-operative, Zero-credit, in which consumers give the industry a real taste of market forces. Anyone aged 16 or over with personal experience of borrowing, past or present, manageable or not, may own a share in our company and have a say in how we run it. Government? Financial institutions? They can throw us on the scrap heap and we’ll all go bust or buy our information to keep us spending sustainably.


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