Recent research has identified 29 areas around the UK where local residents are more likely to have low credit scores and need to borrow. This combination of financial need and poor credit history is creating “credit deserts,” where high-cost lenders are thriving because those who live there are generally unable to access mainstream credit. With such restricted access to good deals on credit, borrowers who are already struggling are being pushed further into the danger zone by high-interest rates that make it difficult to get out of debt. Are you living in one of the UK’s credit deserts and what are the implications of the existence of these areas for the rest of the country?
Where are the UK’s credit deserts?
The think tank Demos is responsible for highlighting the UK’s credit deserts. It identified local authority areas where there are the highest volumes of people with low credit scores, as well as large numbers of high-cost lenders and obvious borrowing requirements. Some of the 29 “credit deserts” that Demos identified include :
Of the total 29 credit deserts that were identified, 15 were located in the north of England. There were six credit deserts in The Midlands and seven in South Wales. Demos found only one credit desert in Scotland and none in the south of England.
The characteristics of credit deserts
More payday lenders, pawnbrokers and rent-to-own shops – in fact, areas of highest credit need to have around five times the number of these types of lenders than areas with the lowest need
Many credit deserts are found in post-industrial towns, often in The North, Wales and The Midlands
The average local resident in a credit desert has a high need for credit but would struggle to access it at an affordable price
Credit deserts vs. credit havens
Although decisions about credit are often assumed to be purely concerned with personal finance, Demos’ research indicates that geography also has a significant role to play. Credit decisions are not made in a vacuum but may depend on what is available in the local area. High levels of unsecured consumer borrowing overall are not generally found in credit deserts. This tends to be more characteristic of areas that are identified as credit havens, where cheap credit is more readily available to local residents with better credit scores. Despite the fact that many personal finance industry businesses have made the switch to online-only, there are still a lot of consumers who look to their local financial infrastructure to make credit decisions. And it’s here that credit deserts are having the most damaging impact.
What does this mean for the UK as a whole?
The main conclusion from Demos’ findings is that there is unlikely to be a single solution for the entire UK when it comes to improving the local credit environment. Increasing the access that everyone has to credit also needs to take into account the local environment and the financial infrastructure that exists there.
The assumption that low-income areas are automatically credit deserts is in fact wrong. There are a number of different factors that contribute to whether a location is a credit desert. Some places simply don’t fall within this definition, as although they may have a low average income, homeownership in the area is high. There may also be areas with a higher average income that do fall within the definition of a credit desert. This could result from something as simple as a large local student population or where local employment is unstable.
It’s important to acknowledge that there has been a significant reduction in the number of high street lenders that now exist. There are now fewer lenders in local areas than ever before, as many have migrated online.
Everyone understands what “good” credit is and there is increasing pressure to provide access to this to avert a credit crisis of epic proportions, particularly in areas that come under the definition of credit deserts. Good credit is borrowing that is affordable and sustainable on an ongoing basis. It’s also credit that is more transparently advertised and more openly administered when it comes to terms and conditions.
The shocking revelation of credit deserts has created an urgent need to diversify the options that are available to borrowers all over the UK. This means ensuring that local credit infrastructure is adequate, as well as that which is available online. To discover what types of credit may be available use our Find a Loan tool.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley