UK Cost-of-Living Crisis Behind Overdraft Usage Surge

Overdraft usage in the U.K. has increased by 7.1% since August 2021.

This surge, according to a study of 20,000 ClearScore users who opted to connect their current accounts via open banking, correlates with a 6% rise in essential spend as a proportion of income.

Between them, the figures suggest that rising food prices and monthly bills are putting pressure on Brits’ budgets, with many turning to their overdraft to meet the increased costs.

In an effort to counter the cost-of-living crisis, the government announced the introduction of a new Energy Price Guarantee (EPG) from October, limiting energy price hikes to 27%.

Under the EPG, the average annual gas and electricity bill for a customer with “typical” levels of consumption will stand at around £2,500 from October 2022 to March 2023.

Although this means the price cap has nearly doubled since last winter, if increases were to reflect wholesale gas prices the raise would be even more drastic.

While the government has some power to limit how much energy companies raise their prices, there’s little it can do to combat food inflation in the U.K., which Kantar reported jumped to a record high of 14.7% in November. Worse still, the research firm warned that it’s still too early to call the ceiling, and things may well get worse before they get better.

That means consumers in the country face an average increase of £682 ($835.2) in their annual grocery bill if they continue buying the same items.

Although the global economic downturn and the market turmoil that beset the country in September and October compounded the U.K.’s problems, the current situation has been brewing for years.

On Thursday (Dec. 1), researchers at the London School of Economics published a study showing that in the two years to the end of 2021, Brexit added almost £6 billion ($7.36 billion) to the nation’s food bills as the cost of importing from the EU rose due to increased red tape.

While the Brexit agreement has ensured that trade between the U.K. and the EU remains tariff-free, the study’s authors point to a series of non-tariff barriers that consumers have ended up paying for.

These include new customs checks, rules of origin, and certification requirements for trade in plants and animals.

Brits Adapt Spending, Borrowing Habits

Facing steep increases in the cost of living, U.K. consumers have been making changes to their lifestyles.

Alongside the open banking data, ClearScore published the findings of a survey of 2,000 consumers taken last month which found that 63% of Brits have cut back on nonessential spending while 55% have cut back or delayed big purchases.

See more: UK’s 10% Inflation Rates Stretch Consumers’ Paychecks and Patience

And while the company’s findings reveal that overdrafts are rising, one U.K. lender is trying to break the country’s long reliance on the bank-based credit that determines repayments using interest rates.

Creditspring is offering consumers an alternative way to borrow by charging a fixed monthly membership fee for access to loans rather than interest.

In an interview with PYMNTS, the company’s co-founder and CEO Neil Kadagathur, explained that the subscription finance model can help borrowers avoid debt spirals because they know the costs up front and these remain the same no matter the size of the loan and whether they pay back early, on time, or late.

Watch the interview: Creditspring CEO: Subscription Credit Model Keeps U.K. Borrowers From Falling Into Debt Traps

“The cost-of-living crisis is biting. … Self-reported utility expenses are up 30% in the last six months, transportation expenses 15%, so people who already on average have less than £100 of savings at the end of the month have just seen their expenses increase way bigger than their wages. … This increases the demand for credit massively,” he said.

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