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The rules were meant to stop this
Since 2018, the Financial Conduct Authority's affordability rules have required lenders to check not only whether they will be repaid, but whether borrowers can repay without harm. Yet our new report, In the Balance, finds that around 1.15 million low- to middle-income households were given new or more credit when they were already persistently unable to meet their essential costs. Over two and a half years, they took on at least £1.97 billion in new debt.
How does this happen under a regulatory regime designed to prevent it? And why has the public debate been so focused on the opposite problem: that too many people are shut out of credit?
In our previous blog, we argued that the financial inclusion debate confuses creditworthiness with affordability, and that a ‘responsible borrower’ who pays on time may be doing so by going without essentials. Drawing on five waves of the Bank of England/NMG survey of household finances, from September 2023 to March 2026, In the Balance now puts numbers to that argument.
Credit is not scarce. For millions, it is unaffordable
Over 70% of low- to middle-income households have used consumer credit at some point in the past two and a half years. Snapshot surveys, which put the figure nearer 55%, understate how widespread credit use really is.
Nearly half of those holding credit, around 3.5 million households, cannot afford both their essential living costs and their repayments. Their typical (median) budget shortfall is around £633 a month, or £7,600 a year. This is measured against a deliberately conservative benchmark of essential costs, which leaves out Council Tax, water bills and childcare.
For most, this is not a passing difficulty. Nearly three-quarters of households in shortfall are still in shortfall six months later. We estimate that 2.6 million households are trapped in this position persistently, and 1.5 million of them are cutting back on food, heating and other necessities to keep up repayments on around £7 billion of consumer credit debt.
The 1.15 million households lent more were already in this position before the additional lending. Their budget shortfalls preceded the additional credit. The new credit did not cause the shortfall, but it increased their hardship. And most of that lending did not come from payday lenders or unregulated Buy Now Pay Later. It came through mainstream products, fully regulated credit cards, overdrafts and personal loans.
Why the rules are failing
The FCA understood the risk when it wrote the rules. Its 2017 consultation paper warned that, without a requirement to assess affordability, firms “may be motivated to offer unaffordable credit to applicants who they expect to be profitable even if they are at high risk of suffering financial distress”. Our evidence suggests that the risk the FCA warned of has too often been realised.
Three features of the current framework explain why.
The rules leave lenders to decide what ‘affordable’ means. Lenders must avoid a “significant adverse impact” on a borrower's finances, but ‘significant’ is not defined. FCA guidance says borrowers should be left with enough for a “basic quality of life”, but that is not defined either. Checks need only be “proportionate”. In practice, the firms that profit from lending decide where the line between affordable and harmful falls.
Repayment performance hides the harm. Among households without a mortgage who hold credit and are in persistent shortfall, four in five keep up their credit repayments. The credit score system disciplines borrowers to make their credit payments on time, because missed payments damage future access to credit. So lenders see profitable customers, even when that customer may be struggling the most.
The cost is passed on to others. Among households without a mortgage, 14.5% of credit holders report bill or utility arrears, against 8.3% of those without credit. Among renters, 21.2% of those with credit are behind on rent, against 9.7% of those without. After controlling for income and savings, households with credit have around 1.7 times the odds of falling behind on household bills, and more than twice the odds of rent arrears. Landlords, energy and water companies, and councils are left to pick up the bill.
This is not, in the main, a story of rogue lenders operating at the margins. It is the predictable result of a framework that is reasonably protective on paper, but leaves too much discretion to lenders and is not sufficiently or rigorously enough enforced. We have warned elsewhere about the dangers of Government removing an important backstop to this.
What about exclusion?
When BNPL regulation came into force in July, some warned of a “credit cliff-edge”: that affordability checks would unfairly exclude lower-income households from credit they need. The evidence does not support that fear on any significant scale.
Of the 3.4 million low- to middle-income households without a mortgage who held no consumer credit at any point in the survey, 41% are financially comfortable and have little need for it. A further 24% are in such severe difficulty that lending to them would deepen their hardship, not relieve it. Only around 1.2 million sit close enough to the borderline to be at risk of unfair exclusion, and most of them would pass an affordability test for a well-designed, low-cost product. Between 262,000 and 626,000 would fail a reasonable affordability assessment (around 1% to 4% of households on low incomes). That is a real problem, but it is one of product design, loan size, and term, not a reason to diminish important protections from unaffordable lending.
It is important to say, that we do not dismiss the households who lose access to credit because of thin files, or a record of missed payments and impaired credit records. But the route from inclusion through missed payments and into exclusion, is narrower than often assumed; and it is a journey that’s often stated by irresponsible lending practices.
What needs to change
The Government's Financial Inclusion Strategy aims for everyone to have access to “safe, affordable and responsible credit”. We share that ambition. But it cannot be met by expanding access to credit alone. The emphasis must be placed on safety, affordability and responsibility. We are calling for:
The FCA to draw a clear line around the market: requiring lenders to test for persistent budget shortfalls against clear benchmarks of essential costs before lending, and to tell borrowers that repayments should not come at the expense of essentials, setting out forbearance options before arrears build up.
HM Treasury to set a baseline and targets for reducing irresponsible lending in the Financial Inclusion Strategy, tracked through a dedicated longitudinal survey.
Fair4All Finance and the financial inclusion sector to focus Dormant Assets and other public funding on low-cost, preferably interest-free alternatives for households in persistent shortfall, with independent evaluation of outcomes for borrowers.
The Credit Information Governance Body and credit reference agencies to use credit data to identify households in financial distress and route them to debt advice, not to further lending.
Government to complete the Insolvency Review and to create a fast-track route to write off debts that cannot be repaid without sustained harm, alongside a comprehensive plan to address inadequate household incomes.
Credit is not a solution to persistent income inadequacy. Extending more of it to households whose fundamental problem is that their incomes do not cover the essentials will, at best, defer the problem. At worst, it deepens it, while shifting the visible symptoms onto landlords, utilities and public services.
The task is not to open the credit market further. It is to make the credit already flowing through it safer.
Read the full report: In the Balance: Consumer Protection and Credit Exclusion in the Affordability Crisis.
