With Christmas just days away, the excitement of festive parties and anticipation of a well-earned holiday with family and friends can be enough to distract some of us from the inevitable overspending. The accumulation of debt carried into the following year is a reality for many – and with so much pressure to have the perfect Christmas it’s not difficult to see why.
According to research commissioned by Debt Hacker, 35% of British people say they feel pressure to spend more than they can afford at Christmas. Similarly, research from MoneySuperMarket reveals that 31% of us expect to overspend at Christmas, plus more than one in ten (11%) say they are kept awake at night worrying about the cost. It seems the tendency to over-indulge and out-do the previous year’s gift buying forces even the most careful of spenders to throw caution to the wind and rack up a bit of extra debt in the name of festive cheer.
The cost of Christmas becomes even more acute for low income households, many of which are struggling to cover normal household bills without the extra cost of the holiday season. The Poverty Premium impacts many of these families, indeed, there are around 14 million people in the UK who pay more for goods and services simply because they are from poorer households. A 2016 report by the University of Bristol revealed that the poverty premium paid by low-income families is, on average, £490 per year – enough to help with the cost of Christmas, but with 21% of the UK’s population in low-income households and paying over the odds isn’t it time we all stopped to question why this unfair and unequal status quo is allowed to continue?
Unfortunately, the mounting pressure of the season can force many low-income families to seek support from payday lenders in order to provide their families with the type of Christmas that most of us take for granted. Poor always costs more when it comes to gaining access to loans with expensive payday lenders typically charging between 800-1200% APR. These loans and the continued financial burden they put on individuals and families can cause ongoing hardship for years to come. Going back to Debt Hacker’s research, 52% of those with payday loans said they go without buying Christmas presents and 44% said they miss out on getting together with family altogether because they can’t afford to go.
The Poverty Premium can manifest itself in a number of ways. For example, 1.5 million people in the UK do not have a bank account. This may force them to use more expensive, cost-per-transaction, pre-paid card providers to purchase gifts. Similarly, these households are more likely to be paying pre-paid tariffs for energy which ramp up costs even more over the holiday season. These individuals and families are financially excluded from cheaper products, services and finance which adds to the cost of Christmas and burden of debt.
Financial exclusion has become a reality of our society but there is another way. In today’s technology driven world, everyone should have access to the same products and services. Access to Credit Unions, Community Banks and Community Development Financial Institutions (CDFIs) would, for example, offer lower income families’ access to finance, and financial inclusion that was fairer and more ethical.
Traditionally Credit Unions have struggled to compete with the likes of Wonga and QuickQuid. These payday lenders capture the market via easy, online access and high-profile advertising campaigns directed at those who can least afford their high-interest loans. Unfortunately, Credit Unions often have limited branch networks (some have no more than two branches servicing a given area), plus they struggle with legacy technology and paper-based systems which make their service extremely slow and inaccessible. Traditionally members have to physically go into a branch and either withdraw or pay money in using only their membership number.
The solution is simple. Open up the services Credit Unions can offer and give access to a wider audience through technology. Better branch access via partnerships with wider networks, plus a debit card (rather than simply a Membership number) would allow the financially excluded to access additionally services at the same price as the wider population and better online access and automation.
Access to affordable, responsible finance is at the heart of eradicating the Poverty Premium. Giving the financially excluded access to bank accounts, debit cards and lower interest loans so they are paying the same costs at Christmas as everyone else won’t eradicate debt, but it will create a fairer playing field when it comes to financing the holiday season and paying back debt into the New Year.