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‘Financial inclusion’ should help people withstand financial shocks, not deepen them. Yet the current agenda focuses overwhelmingly on increasing access to credit per se, rather than on credit that people can genuinely afford.
Before Government builds policy around closing an alleged £2 billion ‘credit gap’, it needs to take a hard look at the evidence, and at the other side of the ledger. For many lower-income households, the bigger problem may not be too little credit but too much.
A cliff-edge, or a safety rail?
When regulation of Buy Now, Pay Later (BNPL) came into force on 15 July 2026, some greeted it not as an overdue consumer protection but as a threat. Fair4All Finance, the body Government established to channel Dormant Assets funding towards financial inclusion, warned of a “credit cliff-edge” for BNPL users. In its response to the new rules, it noted that “nearly half of those likely to be rejected have not missed a BNPL payment, so there’s a real risk that many people who currently use BNPL responsibly could be unfairly excluded.”
Two ideas underpin this argument. The first is that a borrower who pays on time is, by definition, behaving ‘responsibly’. It is implicit that they can both afford their credit and are doing the 'right thing' by making their repayments. The second is that there is a significant problem of exclusion: a large pool of unmet demand among lower-income households, often summarised as a ‘£2 billion credit gap’. Both rest on the same confusion.
Creditworthiness is not affordability
When lenders decide whether to lend, they must answer two different questions.
Creditworthiness asks whether the lender is likely to be repaid: the risk to the lender.
Affordability asks whether the borrower can repay sustainably: the risk to the borrower.
The two often diverge. A borrower may never miss a payment because they keep up repayments by cutting back on food and energy, falling behind on rent or Council Tax, or borrowing elsewhere. In 2022, Citizens Advice found that more than two in five BNPL users had borrowed on credit cards, overdrafts or payday loans to make their repayments. On-time payment tells us the lender is being repaid. It does not tell us the credit is affordable.
That is exactly why the Financial Conduct Authority (FCA) introduced explicit affordability rules for consumer credit in 2018. As its consultation paper explained, “without a requirement for firms 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.”
The rules require lenders to consider whether customers can repay over time without a “significant adverse impact” on their financial situation, and the Consumer Duty now also requires firms to avoid causing foreseeable harm.
The affordability rules are therefore designed to stop some lending to people who would, in fact, be 'good payers'. Seen in that light, the observation that many of those likely to be rejected for BNPL have not missed any of their payments misses the point. It is what an affordability test is supposed to do. Whether lenders strike the right balance in individual cases is a fair question, but a missed-payment record cannot answer it.
Responsible borrowers’, and who picks up the bill
Consider a parent who needs school shoes for a growing child but cannot afford them. The need does not go away and, in the absence of alternatives, many use credit to meet it. As a ‘responsible borrower’, they then make every repayment on time and in full. But if their income was already too low to cover the essentials, those repayments must come from somewhere. Meals are skipped, the heating goes off, and Council Tax, rent and utility bills fall behind.
The scale of the problem is considerable. The Joseph Rowntree Foundation’s latest cost of living tracker found that a record 7.4 million low-income households had gone without essentials in the previous six months. Almost four in ten were behind on at least one household bill or debt repayment, and 3.8 million had borrowed to pay for essentials. These are not households shut out of credit. Many are already using it to cover a gap their incomes cannot fill.
Why would a household under such pressure put its credit repayments first? Because the credit system encourages it. Missed payments damage credit scores, and credit scores govern future access. Our report Good Score, Empty Cupboard found that a third of lower-income borrowers, some 6.4 million adults in Great Britain, are cutting back on essentials specifically to protect their credit scores.
This is not responsible borrowing in any meaningful sense. It is a transfer of risk from lenders to the public sector and everyone else. The lender sees a customer who pays on time. The costs show up instead in missed payments to councils, landlords, and energy and water companies. Council Tax arrears in England rose from £5.9 billion in 2023/24 to £7.4 billion in 2025/26, and energy debt more than 91 days in arrears more than doubled, to £4.79 billion, between early 2023 and early 2026.
If the test of a ‘responsible borrower’ is simply paying the lender on time, many households can pass it only by becoming ‘irresponsible’ taxpayers, tenants and energy customers instead. The concept collapses under the weight of the affordability crisis. Responsibility for unaffordable lending lies with the lenders who decide whether, and on what terms, to lend, not with households forced into impossible trade-offs.
What does the ‘£2 billion credit gap’ measure?
The Government’s Financial Inclusion Strategy sets out a commendable ambition: that people should be able to access “safe, affordable and responsible credit”. We share it. But the Strategy does not define those terms, establish how many people use credit on that basis, or count the inverse: how many have been lent to unaffordably and irresponsibly.
Into this space has stepped a single figure. Fair4All Finance and others have argued that there is a £2 billion gap between the credit lower-income households need and what the market delivers. The figure originates in a November 2023 note by L.E.K. Consulting. It estimates that 16.3 million adults with thin credit files, impaired credit records or high levels of debt need around £19–20 billion of credit, of which roughly £13 billion is already met. L.E.K. then sets aside the unmet need of an undefined ‘severely credit challenged’ group as commercially unviable. The £2 billion is what remains: “unmet but potentially commercially viable” demand. No calculations are shown, and the underlying survey is not published.
To be clear, we do not doubt that many people are turned down for credit on creditworthiness grounds, because of a thin credit file or a past default, even when they could afford to repay. That is a real problem, and we call for specific remedies: taking account of borrower contexts for missed payments, such as short-term periods of ill-health and unemployment; lenders designing more flexible and affordable products, and the expansion of social lending including interest-free loans. To boost genuinely affordable lending through the credit union sector we have also long supported calls for a Fair Banking Act.
But the £2 billion does not measure that problem. It measures where commercial lenders could profitably lend. It cannot tell us whether that lending would be affordable, or whether households who could not afford more credit remain within it. L.E.K. itself acknowledges that for some households, “although they would like to have the money, means other than further borrowing are needed”. Nevertheless, its proposed remedies include “rebalancing elements of current regulatory approach” and “flexibility around creditworthiness assessments”. The £2 billion is a measure of commercial opportunity, not of affordable need, and it should not be presented as anything else.
Coming soon: In the Balance
Getting the balance between access and protection right is critical when millions are struggling to afford the basics. Our forthcoming report, In the Balance: Consumer Protection and Credit Exclusion in the Affordability Crisis, begins to provide the baseline the Financial Inclusion Strategy lacks. Drawing on five waves of the Bank of England/NMG survey of household finances, from September 2023 to March 2026, and following thousands of households over time, it examines how lower-income households use credit; how many are excluded and on what grounds, how many cannot afford their repayments alongside essential costs, and whether additional, potentially irresponsible, lending is being advanced to households in persistent difficulty.
The correct balance will not be struck while the debate confuses creditworthiness with affordability; mistakes on-time payments for ‘responsible borrowing’ or sizes a ‘credit gap’ by commercial viability. It must start from what households can genuinely afford, and from honesty about the costs, to households, to the public sector and to everyone else, when credit is extended to those who cannot afford it.
