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Catherine Furze

Spiralling costs forcing families to use credit to pay essential bills

Concern is growing over hard-pressed families who are being tempted to spread the cost of essential bills by using buy now, pay later (BNPL) credit. Households struggling with surging energy and spiralling food prices are being tempted as the cost of living crisis deepens, according to consumer groups.

Energy and debt advice groups have warned the “really worrying” development is a sign that individuals and families are having to resort to increasingly “desperate” measures to cover basic expenses, and the top financial watchdog, the Financial Conduct Authority, has issued a warning over their use as data revealed Brits are turning to the products to ease the pain.

The FCA, which announced a clampdown on the BNPL sector last month, has said soaring inflation underlined the need for regulation of BNPL products, which is unlikely to come into force until next year. BNPL is a type of short-term financing that allows consumers to make purchases and either delay the whole bill or split the cost into a clutch of equal instalments, interest-free.

Read more: Cost of living crisis sees increase in council tax arrears across Northumberland

BNPL was traditionally only found on the checkout of online retailers and exploded in popularity during the pandemic. BNPL has quickly risen to prominence in the UK in the last decade, with Swedish challenger bank Klarna, which arrived in the UK in 2014, spearheading the new form of credit.

The concerns came comes as data showed nearly one in 10 people have used BNPL schemes to cover essentials, while six per cent said they have bought groceries using BNPL, according to research for Hargreaves Lansdown. A Which? report raised concerns in a report which showed that some customers were spending beyond their means and many seemed unaware that they were taking out loans, believing instead that BNPL services were a money management tool.

More recent concerns have stemmed from a company called Zilch which provides customers with credit that can be spent on essentials such as energy bills and groceries, with 25% of the payment required upfront. While the company has been operating since 2018, a sharp increase in energy prices recently has caused it to grow in popularity.

But Zilch maintains it is a better alternative to credit cards and other types of loans. A spokesperson for the company said: “With the cost-of-living crisis, consumers need access to innovative regulated options to pay and awareness of better alternatives for more responsible spending and lending. Zilch offers its customers the ability to spread the cost of their payments for zero per cent interest, budgeting their finances responsibly.

“Unlike credit card providers or banks, Zilch offers zero interest rates and no late fees. Anyone who falls behind on repayments is immediately stopped from borrowing any more and provided with contacts for independent debt advice charities.”

However, uptake of this service is being seen as a cause for concern by many. Sue Anderson, head of media at debt charity StepChange said: “The use of BNPL services, as with any other form of consumer credit, to pay for essentials is extremely worrying, particularly given the rising number of people struggling due to the cost of living crisis.”

For those facing difficulty paying their bills, Citizens Advice recommends speaking with your energy supplier to work out a payment plan before using credit. Matthew Upton, director of policy at Citizens Advice, said borrowing through BNPL “can be like quicksand — easy to slip into and very difficult to get out of”.

Miles Robinson, chief commercial officer at Haysto, a UK mortgage broker for people with poor or complex credit situations, issued a stark warning on using BNPL for these bills and advised households that they should treat using BNPL offers with extreme caution. He said: "BNPL can be easy to get into and very difficult to get out of. And now with BNPL services like Klarna starting to report on transactions to Experian and TransUnion, BNPL now has the real opportunity to damage credit scores."

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