Further memorandum submitted by Citizens
Advice Scotland
1. Citizens Advice Scotland welcomes the
Committee's Inquiry into poverty in Scotland. We have already
submitted written evidence on poverty and the CAB Service,[13]
and are pleased to have the opportunity to submit further evidence
on the issue of poverty and debt.
2. Credit is almost an inevitable consequence
of living on a low income—short and long term loans, credit
cards, catalogues are all used to deal with crises and unaffordable
needs. Many people manage their credit commitments, however, the
CAB service deals with those who don't. This can be due to insufficient
levels of income as well as changing circumstances resulting in
a drop in income, pushing people into poverty. Extortionate and
unfair lending practices combined with lack of access to affordable
credit all contribute.
3. Last year, the Scottish citizens advice bureaux
dealt with 88,307 new debt enquiries—a 3% increase
from the previous year. Enquiries about debt include consumer,
utility and housing debt and make up one in every five of the
442,550 issues dealt with by the CAB service. In 2005-06, the
total amount of new debt dealt with by the service was £211
million—this is a significant increase from the previous
year of £163 million.
4. In 2004, we carried out research into
our debt clients.[14]
We found that:
— In the last two years, our clients'
debt levels had increased by 64% and were now on average £13,380
— One in five had debts of more than
£20,000 excluding mortgages
— 14% had five credit or store cards
or more, with some having up to 13 different credit and store
card debts
— Nine out of ten debt clients had
some form of consumer debt, half had at least one credit card
debt, and half had a personal or unsecured loan
— Four out of every five debt clients
had multiple debts, with nine out of ten debts being owed to mainstream
creditors. The average number of debts had increased to approximately
five, with one in every five clients servicing eight or more debts.
5. Our findings also showed that this level
of debt was unmanageable for many of our clients. We found that:
— Over half of them had monthly household
incomes of less than £800
— One quarter lived on less than £400
per month
— Half had no income other than pensions
or benefits
— On average, for every £1 of
monthly income, clients owed almost £22 of debt excluding
mortgage—the level of debt stress had doubled in 2 years
— One in six felt under pressure to
take on further borrowing or had had their offer to repay rejected.
Just over half had actually borrowed more to try and deal with
their debts.
6. Our findings showed that people were
in debt due to changes in circumstances and chronic causes of
poverty. A drop in income, job loss, illness, low income or disability
all being major contributing factors, however alongside these
issues were high interest rates, credit charges and easy access
to credit.
7. Circumstances can be stacked against
clients on low incomes before they start. Due to their low level
of income, they have limited access to affordable credit and as
a result pay disproportionately high interest. As they struggle
to manage their debts, they are faced with charges and additional
interest imposed for missed and late payments—this often
pushes a debt into an unmanageable and unaffordable figure. 8. The
following are examples taken from our bank of CAB evidence that
illustrate typical debt cases brought to local bureaux.
— A 70 year old pensioner running a
loan with an Annual Percentage Rate (APR) of 246% or
— A female client with mental health
problems running a loan with an APR of 177%
— A client with a £500 debt to
be repaid over 26 weeks but with £228 interest applied.
Hidden Charges and interest on missed payments
— A client with a £1,500 loan
who had been paying reduced payments for almost six years—then
found her debt was now £10,000 due to a mixture of late payment
charges and escalating interest
— A lone parent owing £500 paying
reduced payments of £20 per month. By the time interest and
charges were applied only 15p per month was going towards the
debt
— A client's loan doubling from £750
to £1300 due to regular £25 arrears charges
Charges for bounced direct debits and unauthorized
overdrafts
— A client with a £100 overdraft
that ended up at over £600 due to ongoing charges
They decrease the payments, but increase the
debt and the repayment period.
— A client who took out a consolidation
loan with her bank for £25,000. Added to that was a £25,000
credit charge, and £19,000 insurance, making a total of £69,000
payable at £575 for 10 years—this was 40% of her income.
Used to pay off existing loans, but increase
overall debt levels.
— A client in receipt of incapacity
benefit who took out another loan to pay off her original loan
resulting in increased debt but little cash in hand. Her income
was £80 per week but she now had a debt of £1,600 repayable
at £42 per week.
— A client whose sole income was benefit
and occupational pension having five credit cards from the same
bank with debts of over £17,000
A young male client earning £230 per week
allowed to accumulate £69,000 of debt in loans and credit
cards from high street lenders and banks
9. These typical examples reflect what the
CAB service see daily—clients struggling to manage the unmanageable,
trying to repay debts that can never be repaid due to the extent
of indebtedness, the limited income and the conditions attached
to the loans. Our 2004 research showed that the situation had
worsened dramatically for low-income clients in a two-year period.
Our current statistics show that consumer debt remains the largest
single issue dealt with by the CAB service and is increasing year
on year, alongside overall indebtedness levels. While reforms
at both Westminster and Holyrood such as the Consumer Credit Act
2006 and the Bankruptcy and Diligence etc (Scotland) Act 2006
will impact on some aspects of the problem, nevertheless debt
and poverty seem intrinsically interlinked with limited solutions.
Susan McPhee
Head of Social Policy and Public Affairs
Citizens Advice Scotland
June 2007
13 Memorandum submitted by Citizens Advice Scotland
to the Scottish Affairs Committee October 2006 Back
14
On the Cards February 2004 http://www.cas.org.uk/onthecards.aspx Back
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