Household finances under strain again post-pandemic as credit use and social benefits on the rise, shows Lowell’s Financial Vulnerability Index

As the UK continues to assess the impact of the pandemic on household finances, the latest update to Lowell and Urban Institute’s UK Financial Vulnerability Index (FVI), the most up-to-date index on UK household financial health based on anonymized data from over 9.5m Lowell customers, has shown that financial vulnerability (FV) has continued to rise, despite Government support through the pandemic having an initial impact.

The Financial Vulnerability Index, a joint project between Lowell, one of the largest credit management services companies in Europe, and the Urban Institute, a leading U.S.-based research organization, uses unique Lowell data and publicly available data to measure household financial vulnerability across the UK.

John Pears, UK CEO of Lowell, said: “We are concerned about our nation’s financial health. With COVID support falling away, we can already see vulnerability ticking up. This has been rising since 2017 and we need to have an honest conversation about why.

“There are real life systemic challenges and debt traps that are not being addressed. They are supporting vulnerabilities across the UK. Whether it is the lack of savings, growing use of credit or alternative high-cost financial products as well as social benefits – these are elements that undermine the financial resilience of our communities and the financial health of the British public.

“There is not one solution to this. The Government is doing some good work to break debt cycles, piloting no-interest loan schemes. But there is more to do and we are working with others in our sector to help customers rebuild financial health over the long-term and build resilience for the future.”

Signe-Mary McKernan, Vice President for Labour, Human Services, and Population at the Urban Institute, said: “The rapid increase in UK household financial vulnerability associated with the beginning of the pandemic has levelled off, suggesting that pandemic resources and policies have been effective at reducing financial vulnerability.”

“Financial vulnerability was increasing long before the pandemic. The UK Financial Vulnerability Index shows where resources could be targeted to improve financial resilience.”

The new figures show:

  1. Financial vulnerability (FV) is rising again in the UK – Despite Government support during the pandemic and the initial fall in vulnerability during that period, FV is rising again.
    1. Through the pandemic in the UK there has been a 11% rise in financial vulnerability, continuing the pre-pandemic upward trend.
    2. This suggests that while the pandemic caused a rise in vulnerability, which was managed by the Government, there are more systemic drivers of vulnerability that remain unsolved.
  2. Growing use of credit and rising social benefits claimants are driving financial vulnerability in the UK – Despite reported increases in savings during the pandemic, three elements are clearly driving a systemic rise in FV from 2017 onwards and now again in 2021. The latest FVI figures show a:
    1. Growing use of credit that was already accelerating pre-pandemic – average credit use amongst Lowell customers has increased from 39% to 48% during the same period.
    2. Greater use of social benefits – the use of benefits rose 275% from 4% (Q3 2017) to 15% (Q1 2021).
    3. Growth in use of alternative financial products – Adults using alternative financial products went from 6% in April 2017 to 9% by February 2020 according to the FCA’s Financial Lives Survey.
  3. During 2020 Government and business support was effective at reducing financial vulnerability, especially at the peak of the pandemic – The introduction of furlough, UC uplift, payment holidays, business loans and other protection and support measures prevented many from reverting to the use of credit, requiring social benefits and helped many better manage their daily finances and even save.
    1. Financial vulnerability in the UK peaked at 47.0 (Q2 2020), up from 41.1 (Q3 2019), driven by sharp rises in benefits claimants and a boom in credit use from 49% (Q3 2019) of Lowell customers to 54% (Q1 2020).
    2. Government interventions and other support caused a fall in FV over 2020 to a low of 44.7 (Q3 2020) whilst Lowell customers using high-cost loans also fell to a low of 12% (Q4 2020).
    3. Both of these measures have begun to rise again in Q1 2021.
  4. There is considerable regional variation in impact of the pandemic and regional vulnerability profiles differ vastly.
    1. Major cities have seen the highest rises in FV during the pandemic – most driven by an increase in social benefits claimants. In London alone this increased by 200% (between Q4 2019 and Q1 2021) from 7% to 21%.
    2. The South West has seen a significant sustained rise of over 28% since 2017 as a result of rising social benefit claimants, from 3% to 11% of the adult population by Q1 2021.
    3. The North East remains the most financially vulnerable region with the highest data measurement across four of the six components of the index.