Lime Legal

End of the line

Published 01 November 2023

People struggling with the rent or mortgage are using high-cost credit cards to cover the gap, write Bill Rashleigh and Tony Marshall

Hard-pressed borrowers are seeking ever more risky – and expensive – ways to pay for housing as banks tighten up on credit and make it more difficult for the overstretched to remortgage or switch to lower rate loans.

Thousands of people are now using credit cards to cover rent and mortgage payments, according to a survey for ROOF. A YouGov poll found that in some parts of Britain almost one in ten have had to fall back on plastic to keep a roof over their heads.

Borrowing to pay off existing debt is ‘a key indicator’ of financial hardship, says Chris Tapp, deputy director of Credit Action, so the figures suggest that ‘an awful lot of people’ are struggling to cover housing and living expenses.

The YouGov survey asked if respondents had paid their rent or mortgage by credit card in the past 12 months. Six per cent of those who were liable for rent or mortgage answered yes – suggesting a national figure of more than a million people.

Of the regional variations, which were sizeable, the biggest problems were in the Midlands and Wales, where nine per cent – almost one in ten – of those owing rent or mortgage had used money drawn on a credit card to make the payments.

In northern England and London the figures were closer to the national average, six per cent. In Scotland, credit cards were covering the gap for just three per cent.

Young people, including first-time buyers, were more likely to have turned to their flexible friend for help in staving off homelessness and repossession. Almost seven and a half per cent of those between 18 and 24 who paid rent or a mortgage – that’s one in 13 – said they had used a credit card to cover their payments in the past 12 months.

The poll also found that the practice was more prevalent among men than women – seven per cent against six per cent respectively.

The survey of England, Scotland and Wales was carried out the week after the crisis at Northern Rock, Britain’s fifth largest mortgage lender. Any further squeeze on credit resulting from that debacle is likely to push more borrowers close to the edge, says Stuart Freeman, director of advice services at CHAS Central London, which offers advice on housing and debt.

‘This problem is only just beginning to surface and I think things are going to get really bad,’ says Freeman. ‘We’re seeing more and more cases like this every day. There is such pressure on people’s budgets that paying the rent or mortgage with a credit card, then paying that credit card with another card, is becoming the norm for many people. It leads to an ever spiralling maze of debt and eventually the credit simply runs out.’

Most social landlords accept credit card payments, he adds, and staff working in their call centres are instructed to take card payments if tenants are unable to offer an alternative.

But people with mortgage arrears also figure among the victims. Stuart Freeman describes how a client who owned 50 per cent of the equity in his home had got into difficulties. The credit card company obtained a county court judgment and then a charging order securing the debt against the property. It is now threatening to force a sale, making the former owner homeless.

Ramping up the interest

Credit card companies commonly charge interest at between about 15 and 18 per cent – up to 50 per cent above even the highest mortgage interest rates of 11 or 12 per cent in the sub-prime sector. But for people with a poor credit rating – who are likely to figure disproportionately among the number of people using this method to cover housing costs – the companies have special ‘high risk’ rates of between around 34 and 40 per cent – nearly four times the top mortgage rates – or even higher. Such high risk borrowers also figure prominently among the clients of sub-prime mortgage lenders. Stuart Freeman had one client who was charged 60 per cent interest on a card she used to stave off an eviction order.

Not everyone who takes the credit card option is doing so out of financial necessity. For the financially sophisticated, there may be cashback inducements to use a card. But for most people, borrowing to pay off existing debt indicates financial difficulty. Damon Gibbons, chair of the campaign group Debt on our Doorstep, believes the ROOF survey reveals just how far people are overstretched: ‘One in ten is a phenomenal figure and shows that people are significantly overcommitted. It shows they are concerned that they could face repossession action for not paying their housing costs and are keen to try and maintain those payments if at all possible.’

The cost of credit

Using credit to keep up with rent or mortgage payments tends to lead people further into debt. Heather Keates, a director of Community Money Advice, pointed out the dangers: ‘It’s fine if you pay off the balance every month, but I would suggest that the majority of people don’t – they just pay off the minimum, so the debt starts to spiral.’

She fears that the problem will become more widespread because of rising housing costs and interest rates. The consequences will be miserable for some: ‘I reckon that in the next 18 months we’re going to start seeing many more repossessions.’

Stuart Freeman, from CHAS, cites another case of a shared owner who had £50,000 worth of equity and £141,000 worth of credit debt on 14 facilities. ‘The percentage of housing costs in relation to net income is pushing some people, including key workers, in shared ownership over the top,’ he warns.

And those who rent are also at risk from crippling debt; some clients consulting CHAS have run up as much as £50,000 on credit cards. ‘You wonder how on earth they’ve managed to get it,’ says Freeman. ‘They will never clear that debt and a lot of them are going down the bankruptcy route.’

One client, a 59-year-old council tenant on incapacity benefit, had amassed £56,000 in debt. ‘A large amount [of it] was interest and charges but when we asked her how she got into this situation she couldn’t tell me what she spent the money on.’

More information needed

Part of the problem is irresponsible lending and a paucity of proper checks to see if people are in a position to take on credit debt. But pointing an accusatory finger at lenders is too simple, says Heather Keates. ‘The information available to credit companies sometimes isn’t enough for them to make accurate assessments of people’s suitability.

‘If someone is making minimum payments and they’ve got four or five cards, when you do a credit check they don’t look like a bad risk because you don’t have the whole picture of what’s going on. I’m shocked that housing associations, landlords and mortgage companies accept credit card payments at all.’

Indeed, many mortgage lenders and landlords won’t accept direct payments from a credit card, which cost money to process. But there’s nothing to stop people drawing down cash on a card and using it to pay the rent or the mortgage.

Ray Boulger, tactical manager at mortgage broker Charcol, points out that as interest rates have risen, more and more people without a fixed rate have been pushed towards using credit to top up payments they can no longer afford. And once people get into arrears, lenders and landlords are far more likely to accept credit card payments – on the basis, as Boulger puts it, that ‘any payment is better than none’.

But using credit cards to pay for housing is often a desperate – and costly – measure, whether people are paying direct or drawing the cash first and passing it through a current account. ‘It’s expensive drawing cash on a credit card because you’re going to get charged typically 2.5 to 3 per cent just for drawing it out,’ says Boulger – and that’s on top of the exceptionally high monthly interest that could be added to the bill.

If the borrower is struggling to pay monthly bills and only covering the minimum payment, as Heather Keates maintains, it is easy to see how the debt will rapidly spiral out of control at interest levels of up to 60 per cent.

The growth in the sub-prime industry may also be pushing up the number of people falling back on credit cards, Ray Boulger suspects. ‘Knowing the way sub-prime lenders operate, if [borrowers] miss a payment they will call people up pretty quickly. In the mainstream market you’ll probably get a letter.’ After a call, the lender will likely ‘be happy to take a payment in whatever is going’.

Escalating problem

Whatever its underlying cause, it seems the trend is here to stay. While in ordinary circumstances people might use higher interest credit over short periods to juggle their cashflow and scrape by, mounting nervousness is placing pressure on them to extend such borrowings over longer periods.

The credit crunch is forcing those living closest to their financial margins to rely on the type of high-interest emergency borrowing that credit cards represent. ‘Banks and building societies are jittery,’ warns Keates. ‘If they get missed payments they are starting to give their customers less leeway.’

Even if the Bank of England base rate is cut and lower interest rates return for the majority of homebuyers, none of that would help those trapped by uncontrolled debt and unaffordable rent.

‘What is clear is that better advice is needed to help people rearrange their finances and pay less on unsecured credit before this problem escalates,’ says Damon Gibbons, from Debt on our Doorstep.

‘We don’t have a national strategy service for debt advice and somebody has got to address this issue fast.’