Around half of all 18 – 34 year olds in the UK have got into more debt during COVID-19 just to pay for household basics, according to new research.
The Credit Kudos Borrowing index shows young people are more likely than any other age group to report lockdown having a “significant” impact on their income, with only 32% of 18-24 year olds and 38% of 25-34 year olds having three months’ worth of wages in savings, compared to a national average of 52%.
More than half (54%) of millennials and 46% of generation Z are borrowing more money during the crisis, compared to a quarter of the population as a whole. More worryingly, half of all 18-24 year olds are borrowing just to pay for food and household essentials, with 40% of 25-34 year olds doing the same. Three in ten in both groups are borrowing money to cover their housing costs.
The research from Credit Kudos, a credit reference agency, also reveals the kind of debt that young people are using to get by: 60% of millennials who are borrowing during COVID-19 have turned to costly short-term credit, alongside 40% of 18-24 year olds.
This is not surprising. Between a quarter and one third of young people say they have struggled to access mainstream credit from banks in the past, with lenders often penalising young people for renting, moving housing regularly and working in the so-called gig economy.
There are also concerns that lenders will use new technology to see whether young people have requested payment holidays and other debt relief during this period, potentially barring us from cheaper credit in the future. But Freddy Kelly of Credit Kudos believes that lenders could and should use open banking to benefit young borrowers:
“Younger generations have had a really hard time financially, experiencing the 2008 financial crisis, rising house prices, and now the devastating effects of Covid-19. With people in their twenties having such low levels of savings, credit is often a necessity to cope with financial challenges, but many are restricted from accessing it by an outdated credit reporting system that isn’t fit for purpose.
“For example, younger people who rent and move house regularly, work more flexibly as a freelancer or gig worker, or haven’t yet borrowed enough to build up a strong credit history, may be penalised by the traditional credit reporting system. Open Banking data provides lenders with a far more accurate picture of someone’s ability to afford credit, helping them to lend to those that may have previously been turned down.”
I’ll be covering what open banking could mean for your post-COVID finances in more depth this summer – in the meantime, check out my previous blog on young people and debt.