Poor consumers pay credit premium

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People on low incomes are paying over the odds for credit, the influential Treasury Select Committee has said.

In its annual report on financial exclusion, the committee called for action to tackle high-cost credit and illegal money lending.

The committee also said it wanted to see better data-sharing amongst lenders to curb irresponsible lending.

A free-to-use national financial advice network should be set-up, the committee's report added.

"Many of the financial services that most people take for granted are either not available to many of the most vulnerable in our society, or are only available at a premium," said John McFall MP, chairman of the Treasury Select Committee.

"The burden of debt blights the lives of far too many people in our society," he added.

The report identified "priority" areas for urgent government action. These include:

<ul class="bulletList"><li>A clampdown on illegal money lending<li></li>Increased competition in the home credit market<li></li>Better data-sharing among lenders<li></li>New legislation to allow credit unions to diversify, raise capital and reduce their costs<li></li>Making the government's own Social Fund a more effective lender.</li></ul>

Savings boost

The committee also put its weight behind a recent call from the Institute for Public Policy Research (IPPR) to create greater incentives for poorer people to save more.

The IPPR called on the government to top-up the savings of people on low incomes by 50p for each £1 saved.

It has been estimated that 44% UK households with an income below £10,000 a year have no savings.

The IPPR's proposal is very similar to the government's own Saving Gateway pilot scheme.

The Saving Gateway trial saw the government effectively double the savings of poorer people up to a maximum of £375 a year.

Four out of five people who took part in Saving Gateway trials in East London, Manchester and Cambridge ended up saving regularly - which is well above the national average.

Examining the pilot, the Treasury Select Committee report said the results were "most encouraging" and called for a nationwide roll-out of the scheme.

"At present, savings are not given sufficient priority in the government's financial inclusion strategy," Mr McFall said.

"Even small levels of savings are crucial to those on low incomes, as the recent case of Farepak has highlighted."