Context:

The FCA’s Financial Lives Survey shows that three-quarters of UK adults hold one or more credit cards or loan products (or have done so in the previous 12 months). Discounting those people who pay off their balances in full every month, almost half (46 per cent) of all adults are described by the FCA as users of consumer credit. This equates to 23 million people regularly accessing credit. As of October 2018, the average amount of consumer credit borrowed was £4,140 per UK adult. The most common form of consumer credit is an overdraft, followed by credit cards and personal loans. Around six per cent of UK adults have a high-cost loan (or have held one in the previous 12 months).

The study:

This 2019 review from the University of Bristol’s Personal Finance Research Centre had the following five objectives:

1. To understand whether and how consumer borrowing behaviours influence wellbeing;
2. To assess the role financial capability has in borrowing behaviour;
3. To identify the personal factors that influence borrowing behaviour;
4. To understand the role of external factors in influencing borrowing behaviour;
5. To identify the main factors that protect against poor borrowing/repayment behaviours and potentially improve financial wellbeing.

A rapid evidence assessment was conducted to meet these objectives. There were four main eligibility criteria set by the authors for including items in the review:

1. The review should concern formal consumer borrowing;
2. It should be an insight report, an evaluation, a literature review or a meta-analysis;
3. Publication should be no earlier than 2008;
4. It should provide evidence about the UK population or be based on a ‘country that is like the UK’.

A matrix of relevant search terms was used to search for and identify 375 potentially relevant items, which comprised 310 academic papers and 65 reports from policy and stakeholder literature. The items were then reviewed, and any that were out of scope, duplicates, or unavailable were excluded. This left 149 items to include in the full critical review. The papers were then assessed for their quality with three points representing high quality (no concerns), two indicating some concerns, and one meaning low quality (serious concerns). Of the 149 pieces of evidence, 87 were graded as high quality, 57 as medium quality, and five as low quality.

Key findings:

• The report identified five borrowing behaviours linked to strong financial wellbeing, along with associated possible ‘levers’ that may help to change borrowing behaviour (the levers are given in brackets):
• Not needing to borrow to pay for essentials (with a possible lever of boosting income or reducing living costs);
  • Borrowing with restraint and avoiding over-borrowing (credit market regulation, advice and support for burrowers);
  • Keeping on top of debt repayment (credit market regulation, advice and support for burrowers);
  • Reducing the costs of borrowing (credit market regulation, boost affordable credit);
  • Recognising and acting on the warning signs of potential problems (credit market regulation, lender innovation, advice and support for borrowers).
• Income strongly influences borrowing behaviour. Low-income households are less likely to use consumer credit than those on higher incomes, but are more likely to access high-cost credit if they do borrow, often to make ends meet.
• Gender also appeared to play a role, with women more likely to use some forms of high-cost credit than men. They often access home credit more frequently than men, attracted by low weekly repayments and no late payment charges.
• Owning assets is linked to borrowing behaviour, with homeowners having higher levels of borrowing than non-homeowners.
• Psychological factors may shape borrowing, but appear to be less powerful in explaining borrowing than other personal factors, such as income.
• The wider economy plays a significant role in determining people’s financial situations, their access to borrowing and the associated cost of borrowing. Overall levels of borrowing rise when the economy is strong, and fall when macro-economic conditions are poor.
• Borrowers are attracted to high-cost credit by speed, convenience and easy access, especially when there are limited mainstream alternatives available.
• Poor borrowing behaviours are linked to low financial literacy levels, with young people particularly at risk due to having lower overall financial capability. The authors state that the evidence regarding the impact of financial literacy programmes on financial behaviour is relatively weak.
• The authors identify four gaps in the evidence on borrowing behaviour, relating to:
• Young people, and in particular why young people borrow and what motivates their borrowing.
• What people use credit for, particularly people on higher incomes.
• The role of technology where, despite an increase in accessing credit online, there is little research.
• The role of social norms, particularly ‘keeping up with the Jones’ and increased social interaction, as well as the normalisation of borrowing among younger people.

Points to consider:

• This report is relevant to all stakeholders, academics and policymakers with an interest in consumer borrowing behaviour in the UK.

• The research is generalisable to the UK, though readers should be aware of the fast-moving regulatory environment when drawing implications from the review’s findings