Experiences of debt problems and pre-arrears intervention Sharon Collard and Andrea Finney, PFRC

Pathways to problematic debt

First steps to borrowing The normality of borrowing –A right of passage in early adulthood –Responding to offers of credit An initial cautiousness –Low monthly balances, settled in full –A credit card kept for emergencies only Unused facilities building capacity for the future 3

Accelerators of borrowing Borrowing against the future –Expectation of career progression/future wealth –A sense of deserving; a signal of success Borrowing to invest in business –Blurring the line between personal and business Unanticipated life events –Loss of earnings or other income 4

Escalation of borrowing in hard times A desire to maintain current lifestyle –Cutting back too little too late –Drawing instead on existing unused facilities Optimism about future earnings prospects –And future ability to repay borrowing Comfort spending 5

Perpetuating the debt problem

The role of credit in managing unmanageable debt Increasing limits and taking on new commitments Using credit to repay borrowing –Cash advances to repay other credit cards –Using 0% credit card deals to clear other balances –Consolidating multiple commitments But existing commitments are retained –And available credit limits (ultimately) re-used –Especially true of credit cards 7

Reinforcing credit use as a coping strategy Perception that the sum owed remains affordable –Minimum payments are being met Detachment from the total amount owed –With balances across multiple products Ability to obtain more credit –Validates continued borrowing Underpinning optimism of an improving situation –But also a denial or fear of consequences Perceived lack of (alternative) options 8

The signals of problem debt and pre-arrears intervention

Help people see the debt flashpoints Spending up to credit limits in short space of time Borrowing to repay borrowing Juggling or falling behind with priority bills For students, still overdrawn when receive student loan Relying on borrowing to manage spell out of work 10

Use simple, credible messages Being told how long it will take to repay your debts. That might make you think twice about needing those boots or that holiday. That there are options other than borrowing and juggling. Learn that debt is not the answer. Don’t bury your head in the sand, don’t think it will go way and get better because it won’t. 11

Early intervention I know the credit card companies are out to make money but there must be alarm bells that ring with spending patterns, you know, maybe when you’re...not paying it off and you’re only paying the minimum and that amount is not going down, you know, there should be some sort of cut off point or some assistance. 12

Impacts of early intervention Improved financial situation Feeling of relief Prompted contact with other creditors Changes to attitudes and behaviour 13

Proactive pre-arrears help and support Getting in contact Early contact, facilitate access to services Customer relations Understanding, friendly, polite staff, treat you as individual Able to deal with the same member of staff Help and support Knowledgeable staff with authority to take decisions Collaborative approach to agree a sustainable solution 14

The research implications

Putting findings into practise 1.How can creditors improve their understanding of the signals of financial difficulty? –And their ability to respond to those signals? 2.How can consumers’ awareness of the signals of financial difficulties be improved? –What are the most workable and marketable messages? 3.What can lenders do to build greater governance into product design to help consumers avoid the escalation of debt? 16

Thank you Rigour Insight Influence