What's the limit on overstretched wallets?

Credit where credit’s due

The Government has proposed relaxing the rules on credit unions so they can widen access to affordable credit and personal banking, but with the cost of living ever-rising will it be enough to help those on the lowest incomes cope?

By Mark Cantrell

From Housing magazine, July/August 2013

MONEY'S tight these days. Incomes are under increasing strain from the rising cost of living; for the poorest in society, the strain of stretching the pennies is particularly arduous.

Last month, the Joseph Rowntree Foundation (JRF) revealed the stark face of “eroding” living standards, with the publication of its annual Minimum Income Standard (MIS) report. This revealed that since the onset of the economic crisis in 2008, the minimum cost of living has soared by 25%. Naturally, incomes have anything but taken flight; rather, they’ve stagnated, or been actively cut in the ongoing process of austerity.

“[F]or the first time since the 1930s, benefits are being cut in real terms by not being linked to inflation. This combined with falling real wages means that the next election is likely to be the first since 1931 when living standards are lower than at the last one,” said Donald Hirsch, author of the report.

The report revealed some startling results, not least the 26% increase in rent for social housing; childcare has risen 37%, food costs have gone up 24%; energy by 39%; and public transport has risen by 30%.

Results are based on the goods and services members of the public think people need to have a minimum acceptable standard of living. By that measure, the MIS suggests a single person needs to earn £16,850; a working couple with two children need 19,400 each; and a lone parent needs £25,600.

“There is a growing gulf between public expectations of the living standard everyone should be able to afford and their ability to earn enough to achieve it,” Hirsch added. “About a quarter of households in the UK fall short of the income required to reach an adequate standard of living – for them a 25% increase in costs intensifies the everyday struggle to make ends meets.”

Katie Schmuecker, the JRF’s policy and research manager, said: “Our research shows that the spiralling cost of essentials is hurting low income families and damaging living standards. Inflation has impacts for us all, but is most keenly felt by the poorest. Balancing weekly budgets has become an unenviable task for those who are worse off.

“Help for families in paying for essentials at more affordable prices can be just as important as improving household income – a precarious combination of rising costs and falling incomes leaves families in a risky position. Cuts to benefits and tax credits – especially cuts to support for childcare – combined with stagnant wages and the rising cost of essentials is resulting in unprecedented erosion of living standards.”

Given the pressures people are facing, it’s hardly surprising that some turn to pay day lenders or illegal loan sharks, even though that road leads to a nightmare of spiralling debt: desperation can provoke some dire decisions – and there are always those looking to take advantage of people at their wits end.

That’s where credit unions come in, offering low-cost loans for their members, but there’s more to these local ‘community banks’ than affordable credit; budgeting – so-called ‘jam jar’ – accounts as well as saver services are part of the package too. For social landlords looking to tackle financial exclusion, they’re important allies in combating illegal loan sharks, and helping residents who otherwise lack any kind of banking service.

Welfare reform and the introduction of Universal Credit have added greater impetus to efforts by social landlords to promote financial inclusion. There’s an element of enlightened self interest, of course – the rent needs collecting – but providing financial services to people, the ability to manage their money better, can be empowering, even if that’s only in a roundabout kind of way.

“Financial worries are awful. You are worrying about your debts, you are worrying about not having enough money coming in, you are worrying about putting shoes on the kids, all those kinds of things,” said Stephanie Noyce, head of financial exclusion at Affinity Sutton.

“That’s the worry with Universal Credit: if your kids need shoes and you’ve only got your rent money left, what are you going to do? Or if your kids need food – I know what I would do – and that puts people in a really vulnerable position, an impossible choice position. You lose whichever way you turn. If we can do something more holistic and give tenants the life skills to manage their own finances, that’s an amazing thing to give them. We know if someone is financially stable and secure, their outlook on life is going to be more positive.”

However, the strengths of credit unions – embedded in local communities – are also something of a weakness in terms of expanding their reach, especially for large social landlords that operate across a wide geographic territory. As Noyce pointed out, it involves the social landlord working with a host of distinct organisations, and there may be gaps in coverage, as it were, where no credit union exists. But that may be about to change with recent legislative changes proposed by the Government.

In June, the Treasury announced plans to introduce legislation in the Autumn that will enable credit unions to expand their operations, and also increase the maximum monthly interest rate charges from 2% to 3% to help them sustain operations. The aim is to widen access to affordable, short-term credit and provide more people with banking services.

“Credit unions provide an invaluable service to people on lower incomes, offering sound financial advice and responsible lending,” said Sajid Javid, economic secretary to the Treasury. “Allowing the maximum rate of interest to increase will help credit unions become more stable and allow them to offer reliable, affordable credit to consumers who may have to resort to more expensive means... This is part of the Government’s efforts to ensure that the credit union sector is in a position to grow and serve a greater number of members without undermining its stability.”

Affinity Sutton has acted to make the most of these changes by entering into partnership with Leeds City Credit Union (LCCU) to launch a national service offering tenants across the country access to a credit union.

“Many of our residents are struggling to make ends meet because of welfare reform and high unemployment. With few other options they are inevitably tempted to use high cost lenders such as ‘pay day’ loans,” said Noyce. “Our partnership with LCCU will enable us to fill this gap and provide all our residents with a wide range of easily accessible and affordable financial products and services, in a supportive and welcoming environment. We hope that the partnership will grow and develop so that over time we can expand the range of products and services on offer.”

The ethical dimension of credit unions is another vital aspect for Noyce, given the vulnerabilities of some of the people she works with: “That to me is what’s really important,” she said. “We’re talking about vulnerable clients – financially vulnerable clients – and because of welfare reform, Universal Credit and all that, they’re going to become increasingly vulnerable. So working with an agency that’s going to be understanding and respectful of that is really important to us.

"We’ve got a group of residents who don’t have a bank account of any way, shape or form, so potentially a [credit union] will give them a product they can use. And it’s going to give them a product that we are confident is safe for them to use because of the responsibility and the supportive role that the credit union will take.”

For any one of us, looking to cope with the increasing costs of living, any means to save money and make the most of our incomes is welcome indeed, all the more so for those whose incomes are tightest of all, but whether we like it or not, there’s a shadow looming over the issue of financial inclusion: how far can a finite income be stretched by even the very best budgeting skills, before it becomes an exercise in futility – because there is simply not enough money to make ends meet?

There is no easy answer to that one, for the housing sector, or indeed for society as a whole. There is only so much that any one individual or organisation or sector can do to hold back the rising tide of poverty.

“It’s a dilemma,” conceded Noyce. “We have a telephone support service for residents that provides financial guidance, and they will explore every opportunity they can with individuals to maximise their income and minimise their expenditure, or access products and services that will help their money go that little bit further, give them practical hints and tips, but – and touch wood we haven’t seen any cases so far – there will come a point where there is not enough money to go around. I guess then we’re looking at signposting people to food banks and to charitable donations, and who knows what else? It’s a scary thought.”

This article was first published in the July/August 2013 print edition of Housing magazine. It was subsequently re-published in the Housing Excellence website, 28 December 2013. Photo courtesy of Affinity Sutton