Ending the high-cost credit trap

Michael Sheen – working to make credit fairer and more affordable

This is a guest post by Sara Williams, who blogs at Debt Camel about everything to do with debt and credit ratings, from bankruptcy to mortgages. If you have ever had high-cost credit, or know somebody in that situation, you will find this of great interest. Please read and share.

In March, the actor Michael Sheen launched the End High-Cost Credit Alliance (EHCA). This is a group of organisations and individuals including debt charities, academics and housing associations.  It describes its aim saying:

People need a fair, affordable credit product. Lenders need a fair, affordable credit product. The Alliance exists to bring fairness for the lenders and fairness for the people they serve.

Michael Sheen said he will be scaling back his acting to support this – but not stopping. He needs to have money coming in to be able to fund the EHCA!

What types of credit are most harmful?

The same week, one of the EHCA’s members, the Royal Society for Public Health published a report called Life on Debt Row, which compared different sorts of lending according to the harm that they have on people’s mental health.

They surveyed 500 people and this is part of the league table that resulted, with the most harmful first:

I don’t think you will be surprised at those results!

You have to be desperate to take a payday loan or always be in over your overdraft limit. The high interest and charges can leave you trapped. Too often people are unable to escape from the problem by repaying the credit because all their payments are eaten up in charges and interest.

I have seen cases of people borrowing every month from the same lender for three years or more. Unable to repay the initial loan, they just carry on borrowing. Many people have been using my How to get a payday loan refund (with template letters) to get compensation of hundreds or thousands of pounds, as often the lenders have broken the regulator’s rules about irresponsible lending.

In contrast Credit Unions not only offer credit to people who may not have a good credit score, but they have much lower interest rates and longer repayment periods. They also encourage their borrowers to put some money aside in savings, so that they will have a buffer for future emergencies. So this is a much more positive experience for customers, allowing them to get back in control of their finances.

End High-cost Credit Alliance wants better alternatives

The EHCA will be campaigning for better regulation for lenders. Introducing caps on the cost of lending, stopping lenders from offering too many repeat loans and making sure lenders conduct proper affordability checks would all be on my list of things that would help!

But just as important is supporting new initiatives that will, like Credit Unions, provide better choices for people with financial problems. People without savings do need access to credit sometimes. However, it needs to be affordable and designed to benefit them, not just to make profits for the lender.

Many of the new initiatives will be small, local lenders such as ScotCash, who Michael Sheen recently visited. I hope we are going to be hearing a lot more of this positive approach in the next few years.