Credit Where Credit Is Due

Despite the huge growth of borrowing in Britain, basic financial services are still out of reach for many people on low incomes. Some 15% of adults in the U.K. don't even have a current account with a bank, according to the research group NOP World — and it follows that the majority don't have mortgages or credit cards. Of course, it would hardly help those with tightly limited means if they were offered unlimited chances to borrow. But in an increasingly credit-driven economy, being poor and low on credit can be awfully expensive.

Consider how people pay for even the barest necessities, like gas and electricity. In the U.K., the government has estimated that people using pre-paid gas and electricity meters — a common method of payment for those on low incomes — pay on average 9% and 14% more respectively than wealthier customers, who are more likely to have their bills debited directly from their bank. And just because lower-income people aren't being served by the high-street banks doesn't mean they aren't still borrowing — it often just means they are paying usurious interest rates. Catalog companies offer installment payments at markups that in some cases are equivalent to annual rates of around 30%, while home loan companies sell unsecured short-term loans door-to-door — and perfectly legally — at rates of as high as 900%. Few good statistics are kept on just how many Britons are tied to the millstone of high-cost debt with moneylenders, but in 1994 the Policy Studies Institute put the figure at 3 million, not counting the victims of illegal loan sharks. Given the growth in borrowing overall, that figure is almost certainly much higher now.

Fixing the problem starts with making it possible for more poor people to open bank accounts, which is easier said than done. Since 2000, the government has been trying to get banks to offer stripped-down "basic" accounts — without the usual checking and overdraft facilities — as a first step for those who don't qualify for full-service current accounts. But are banks really interested in selling them? Last month, the Financial Services Authority, Britain's chief financial regulator, said it was worried that some banks simply aren't telling potential customers about the basic accounts. The British Bankers' Association scoffs at this, pointing to the 800,000 basic accounts opened last year.

Eventually, however, opening a basic account will be effectively mandatory for most low-income people. By end of 2005, the roughly 15 million Britons who receive their welfare and pension benefits over the counter at their local Post Office will instead have their payments direct-deposited into bank accounts. To help smooth the transition, the Post Office itself will be offering basic current accounts.

The next step is to get affordable and manageable loans within reach of people with spotty credit reports, or no credit records at all. Credit unions, which make relatively cheap loans only to members and aren't run for profit, offer one solution. But only 1% of British adults are in credit unions today, compared to 25% in the United States and 50% in Ireland. Ironically, in order to get more capital to lend to the less-well-off, the credit unions need to do a better job of cracking the middle-class market. In other words, they need to look and act more like banks. Says Chris Smith, group corporate affairs manager at the Co-operative Bank, which sponsors the credit union movement: "The larger membership will give them the sustainability, business-wise, to have some sort of effect in society" — by giving their lower-income clients a stake in society too.