Covid-19 affected more areas of our lives than any of us could have imagined at the beginning of 2020. One such area where the pandemic hit people hard was their finances. While some fared well due to reduced expenditure and fewer outgoings, many floundered. Reduced incomes from being on furlough or forced redundancies meant people had less cash to cover everyday expenses. The Government arguably did what it could with a generous furlough and SEISS scheme. However, there were still big groups of the population disproportionately hit by the effects of lockdowns.
One such area that saw a marked change in the finance world was credit. But how? And why? Here, we explore the findings of a recent report by the Money and Pension Service that examined the impact of Covid-19 on credit and people’s ability to manage their finances.
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Impact of Covid-19 on types of credit
The furlough scheme, increases in Universal Credit and the SEISS scheme will have cushioned the impact of the restrictions. However, they were not enough for everyone. The effect of the restrictions materially worsened some people's ability to make their paycheque stretch. The result was many more seeking credit funding, though we accessed different credit types in differing amounts.
At a headline level, credit card finance saw a massive decline in 2020, particularly in times of total lockdown. Credit card borrowing continued to fall through 2020, according to figures by the Bank of England. It found that the annual growth rate of credit card borrowing fell to -14.5% in November 2020.
Other data sources back up these stats. UK Finance found that in their research, credit card spending saw a 25% reduction in 2020 in comparison to 2019. While credit card use went up at times in 2020 (like in Q3, for example), it was still below 2019 levels. Finally, a survey by Finder showed that in November 2020, 41% of credit cardholders had used their credit card the same amount since March. However, 43% had used them more, while only 16% had used them less. These figures start to question how credit card spending reduced overall in 2020. It perhaps helps to begin by exploring the shift in where credit cards were used and by who.
Buy now pay later
A decline in credit card use may have masked a growing demand for credit elsewhere. Payment processor Worldpay has said that Buy now pay later (BNPL) is the fastest growing online payment method in the UK. More and more millennials have now been using this means of payment throughout the pandemic, according to a survey by Finder 35% claimed to have done so, while 24% say they will use it more after the pandemic. Almost a third of millennials asked about BNPL spending said they did so as they did not want to take out a credit card. Generation Z had a similar portion of people saying the same.
The reasons for this increased usage across the board is unclear. Five million people have now used BNPL to buy something since the start of the pandemic. However, it has been highlighted that there is now increased visibility of BNPL by providers and retailers. Plus, many users assert they like to spread out the cost of payment over a long period using interest-free instalments in research conducted by Experian. This is very different to how a credit card typically works. Most items bought through BNPL means were fashion or footwear products, and 75% of BNPL users are female - according to stats from the Financial Conduct Authority.
The use of loans and those accessing affordable credit lines dropped over the pandemic in general. However, one anomaly to this finding was the increased number of applications for small loans. A Carnegie UK Trust survey on Credit Unions found that loans of less than £1000 had a far higher number of applications than those above £2000. Credit Unions and Community Development Financial Institutions also reported that demand for loans was far lower. But, loan values dropped dramatically too. This again echoes the evolving usage of credit cards. It points to different types of people using affordable loans for various reasons.
Impact of Covid-19 on users of credit
The reality of Covid-19 for many people’s finances has been diverse and often according to their demographic. Below are the groups most likely to seek credit and why.
With children at home, parents have been shown to be more likely to fall behind on bills and need to use credit to pay for everyday items. Parents are more financially vulnerable than those living in households without children. It thus makes them more sensitive to losses and unforeseen expenses. An ONS survey found that 47.5% of parents could afford an unexpected but necessary expense of £850, whereas 60.8% of households without children could. Now, one in five parents admits they have had to access credit or ask for money from friends or family more than before the pandemic.
Those with physical disabilities and mental health problems
The sad reality is that those with physical disabilities or mental health problems have been far more likely to suffer from financial difficulty. As a result, they have been a group that have increasingly used credit cards or overdrafts to pay for essentials. A Citizens Advice survey found that those with disabilities were twice as likely to fall behind on paying bills during the pandemic. A different survey by the ONS found that disabled people accessing credit, and borrowing more than £1000, had increased. In June 2020, it had risen by 13% before jumping to 36% in December 2020.
Ethnic minority groups continue to be disproportionately adversely affected by the pandemic. When it comes to their finances, they are more likely to be in rent arrears and behind on their bills. As a result, they have a growing debt burden. According to the IPPR, many people from ethnic minorities think they will fall behind on their bills, with twice as many people from minorities saying so than white people.
Renters have increasingly had to access credit to cover their rent and arrears. Citizens Advice claim that 58% of private renters behind on rent at the end of 2020 were not in arrears pre-pandemic. 40% of those behind on their rent before the pandemic have since fallen further into arrears.
The Joseph Rowntree Foundation has claimed that a massive 42% of renters in rent arrears have had to seek money due to a lack of funds. They have done so through banks or building societies, family or friends or even payday lenders. Additionally, the number of renters who are now claiming benefits has increased. However, benefits are often not enough to meet rental payments. The number of renters claiming Universal Credit and Housing Benefit between the pandemic and September 2020 increased by a third. A common issue among renters seeking benefits is that they chose their rental homes with their income in mind. The result has been rents that are too much for what people can claim.
Additionally, the ban on bailiff-enforced evictions has had an extra effect. While it began to help people struggling because of the pandemic, it also allows individuals to get more and more in debt. That will then affect their future ability to access credit or borrowing.
The Money and Pension Service report has found that young people are now more likely to access informal borrowing to help cover their outgoings. For example, Citizens Advice found that a fifth of individuals between 18 and 34 were behind on bills by August 2020. Only 8% of individuals over the age of 35 found the same. By the end of 2020, the number of young people behind on their bills rose to 27%.
Despite the SEISS, the Bank of England found that 66% of self-employed people will likely see a reduction in their income. Citizens Advice has also reported that the amount of self-employed people struggling with debts has increased. Plus, their ability to pay bills has also waned since 2019. This is echoed in the findings from the ONS that show self-employed people are more likely to borrow £1000 than those in employment.
Despite all their hard work throughout the pandemic, key workers have been identified as a group that is more likely to be behind on bills. Sadly, as a result, they are also more likely to borrow to meet everyday expenses and buy essentials. Supermarket workers, in particular, have been singled out as the group most likely to be unable to pay a bill of £100 that was unexpected. Key workers are also more likely to be worried about debt and missed payments. 41% of social care workers surveyed by the RSA, for example, were concerned about debt levels. Sadly, they were also the most likely to go without essentials to make their pay stretch further.
The shock of the pandemic has been like a perfect storm on low-income households' finances or income. They were financially vulnerable to small shocks even before the pandemic. As a result, with those in lower-income jobs more likely to be furloughed, over half of low-income households have had to borrow money. Consequently, they were far more inclined to pay for everyday items and essentials through credit cards with high interest rates.
Covid-19 and the impact on personal finances
The sad reality is that the headline figures surrounding credit throughout the pandemic mask a serious problem. Many higher-income households have managed to come through the pandemic unscathed. And while some have even come out in a financially better position - many have not.
More and more families are using credit to cover day to day expenses. Due to reduced incomes and increased expenditures, they are forced to access credit. As a result, they become financially even more vulnerable. So, despite an arguably improving pandemic picture, the Covid-19 repercussions on people’s finances could be as long as the disease itself.