UK households face £6bn debts because of Covid-19, says charity
British households are expected to rack up debts worth a combined £6bn because of the coronavirus crisis, as millions of people fall behind on credit card payments, council tax and utility bills.
Sounding the alarm as the economic fallout from the health emergency mounts, the StepChange debt advice charity said 4.6m households risked building up dangerous levels of debt because of the pandemic.
The charity warned that debts racked up during the crisis would stifle the country’s economic recovery and that debt advisory services would be deluged once the reality of people’s situations began to hit home in the coming months.
In response to the looming national debt crisis, the Treasury said it was pumping an additional £38m of funding into debt advice services to help manage a flood of new arrears cases.
John Glen, economic secretary to the Treasury, said: “We know that some people are struggling with their finances during this difficult time, which is why we want to make sure people can access the help and support they need to manage their debts and get their finances back on track.”
StepChange said debt charities were gearing up for a doubling of demand for their services as Covid-19 and lockdown measures triggered rising job losses and reduced working hours and pay.
According to a study carried out by the organisation, each affected adult will have accumulated an additional £1,076 of arrears and £997 of debt on average each because of the health crisis. StepChange said 4.6m households had been affected so far.
But despite the mounting risk of financial hardship, many people have saved money during the early stages of the pandemic, as lockdown has prevented them from eating and drinking out, visiting most shops and commuting to work.
Amid the biggest-ever fall in consumer spending, UK households repaid a record £7.4bn of debt on credit cards and personal loans in April, according to Bank of England figures. Household bank deposits jumped by £16.2bn, more than triple the average monthly rise.
The savings boom has, however, been uneven. According to the Resolution Foundation, as many as two in five high-income families have experienced budget gains in the crisis, compared with one in eight low-income households.
StepChange said that since the beginning of lockdown in late March, as many as 1.2 million people had fallen behind on utility bill payments, 820,000 people on council tax, and 590,000 on rent. Around 4.2 million people had borrowed to make ends meet, mostly by using a credit card, overdraft, or a high-cost product such as a payday loan.
According to the charity, as many as 2.7 million people have used payment holidays on mortgages and credit products that were brought in after talks between ministers and the banking industry.
The government has extended payment holidays on mortgages by three months. The scheme was announced in March to help borrowers in financial difficulty because of the health crisis and was due to expire at the end of June before it was extended by a further three months. The deadline for applying for an extension was also shifted to 31 October.
The Financial Times reported on Monday that talks with banks were in progress about extending the break for those struggling to repay credit card debts. However, StepChange said more flexible terms would still be needed once the holidays ended to prevent a “cliff edge” for people who needed to start paying back their debts.
Phil Andrew, chief executive of StepChange, said: “We were already dealing with a debt crisis, but COVID has so far added another four million people and counting to the number who are going to need help finding their way back to financial health.
“This is a problem that isn’t going to solve itself.”