Furlough creating a ‘false sense of security’ as debt problems arise – what should you do?

Rishi Sunak urges businesses to use furlough correctly

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Consumer credit statistics have been analysed in the FICO UK Credit Market Report for January which highlighted a mixed “and perhaps confusing” picture of UK consumer finances. The global analytics software provider warned “furlough and forbearance appear to be masking the true impact of the pandemic, which may well lull politicians and lenders into a false sense of security.”

The report highlighted the average spend on UK credit cards fell 14 percent to £570 in January, with payments as a percentage of balance reaching over a two year high.

Worringly, the percentage of accounts and balances missing two payments also continued to increase.

Stacey West, a principal consultant for FICO Advisors, commented on the results: “It is normal to see increases in the percentage of accounts and balances missing payments in January as a result of Christmas spend, but this January the growth has not been as marked as we saw last year.

“This is not surprising due to the continuing furlough payments and payment holidays.

“Other contributing factors are that more card issuers are offering forbearance measures and a larger proportion of borrowers are able to support their debt due to nearly a year of more limited spending. However, of more concern is the increase in the two missed payment rate, with average balances on accounts missing two payments 10.6 percent higher than a year ago.

“As the furlough scheme has been extended to the end of September, with employers starting to contribute as of July, lenders have six months to ensure that they have identified as many of their customers as possible that will be impacted by the withdrawal of the support.

“This is crucial to be prepared for potentially increased volumes of people who need help with their debts.

“Early identification and pre-emptive actions will help to reduce the stress of those impacted in the second half of this year.”

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FICO noted that of particular concern was the fact that average balances on accounts missing three or more payments also continued to increase, with clear indications that once a proportion of consumers miss a payment, they are unable to resume paying, rolling continually through the levels of delinquency.

The data available also suggested it is those with higher balances who are particularly faced with these challenges, as Stacey continued: “In December, unemployment levels were at their highest in nearly five years and there is uncertainty around the true impact of COVID-19 due to the volume of people still on furlough.

“With a lack of clarity around how many will retain their jobs when the scheme ends, this reinforces the need for issuers to be prepared in advance for the effect this may have on the support they can provide to consumers.”

Debt problems will need to be addressed over the coming months as financial payment holidays begin to wind down, which will be felt by around nine million British consumers according to the ONS.

This may prove to be particularly difficult for homeowners and renters alike, with recently published data estimating nearly 500,000 people are in rent or mortgage arrears due to coronavirus.

Additionally, analysis from Metro Bank warned 130,000 are still utilising mortgage holidays which “is of concern” as 16 million people expect their income to fall over the next six months.

Andy Piggott, a Director of Lending Products at Metro Bank, commented on this: “We recognise that homeowners have faced extraordinary circumstances impacting their finances and we are here to help.

“We want to talk to our customers who are struggling and encourage them to contact us as soon as possible.

“Anyone worried about how they are going to start paying their bills again should be proactive in seeking support. Good lenders will want to work with their customers to help find a manageable solution.”

In anticipation of any oncoming difficulties, Metro Bank urged consumers to talk to their lender.

They assured “good lenders want to help” and if consumers can’t resume their payments, they can explore the following options:

  • Short term options, such as accepting reduced payments for an agreed period of time.
  • Long term options, such as extending a mortgage period to reduce payments.
  • Good lenders will explain the impact of what the tailored support means for savers and their mortgages, including what will be reported on a credit file and whether they will be considered to be in arrears during any agreed arrangement

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