The outbreak of COVID-19 resulted in all but non-essential businesses closing to reduce the spread of the virus. Over 2.1 million people applied for Universal Credit in April and more than 10 million people supported by Government schemes. 

The financial stress of COVID-19 has had a significant effect on consumers across the world, with major industries starting to lay off workers. As the UK begins to pick up economic activity in support of the country, solutions to manage debt repayment are still in high demand.   

The implications of some of these short-term solutions could be detrimental to consumers already struggling with debt. We look at two of the most popular solutions; credit card freezes and payment holidays, and how they are affecting UK consumer debt.    

Credit card freezes  

As of May 21st, nearly 880,000 customer accounts had received a payment freeze on credit cards, with another 608,000 consumers receiving payment holidays on personal loan payments according to UK Finance, the banking trade body. These figures show the rate of successful applications to have increased by 26% compared to the beginning of May for credit cards and increased by 30% on personal loans.   

In contrast, figures from the Bank of England showed that UK consumers repaid a record £7.4bn of debt in the first month of lockdown, whilst outstanding debts on credit cards remained the same at £64bn. Concern has been raised that COVID-19 has created a divide in those who have benefited from restrictions versus those who have had to take on unsecured debt whilst being furloughed to make ends meet. 

Debt charity StepChange has reported that 4.2 million people have turned to borrowing, with the most common method being with credit card at 1.7 million, closely followed by overdrafts at 1.6 million and a high-cost credit product at 980,000.   

Payment holidays  

Payment holiday arrangements began in March allowing consumers a 3-month break from monthly repayments without any penalties. This plan was agreed between the government and the banking sector in a response to the significant impact on consumer incomes during lockdown.  

UK Finance announced that lenders have approved more than 1.8 million mortgage payment holidays up to May 20th, accounting for an estimated one in six UK mortgages. With Treasury and financial regulators announcing an extension of a further three-month defer on mortgage repayments due to be available to those who require it, payment holidays could be prolonged.   

Conclusion  

With many consumers still struggling to pay bills as the UK emerges from lockdown, debt management becomes increasingly critical to sustain repayments for creditors whilst at the same time, supporting the most vulnerable consumers.   

The biggest financial concern for many consumers continues to be utility payments and rent. With the percent of those surveyed by Trans Union dropping to 60% in week 5 from a 70% result in week 1.41% of consumers continue to be concerned regarding their utility payments and 31% regarding rent payments.  

It is estimated that an income shortfall of just £520 each month would mean that families would be unable to pay bills in just 6.7 weeks, and as more than 8.4m people have been furloughed during the pandemic, many have relied on the payment holidays offered to make ends meet.   

Concern is growing that by pushing payments off by 3 months, the UK is facing a debt time bomb made worse by mass-unemployment assessed at the worst for 30 years.   

With almost 9 million workers currently covered by the Government’s furlough scheme and reports that companies in all big sectors of the economy are more likely to cut jobs than to hire people from July to September, there is large concern for employees across the UK.   

Large scale job cuts have already been reported by BP, Rolls Royce, Easyjet and Heathrow, putting tens of thousands former employees in financial dire straits. Paired with the existing levels of unsecured debt and shortfall of income against bills already seen, high levels of consumer debt are expected that families may never be able to recover from.   

Debt Charity, StepChange has also revealed that personal debt of £6 billion attributed to the pandemic is already being stored among 4.6 million households with predictions to worsen if left unchecked. 

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Cerebreon supports the debt industry with deep learning and data, using automated technology solutions to support IVAs and Creditors to predict and prevent insolvency arrangement failures. Find out how Cerebreon can help you, visit our Creditor solutions.

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