By Sinead Cruise and Iain Withers
LONDON (Reuters) - One morning, after years of financial prudence and solid creditworthiness, you wake up and it's all gone. You're no longer worthy. You're a risk. In fact, you're sub-prime.
That is the fate facing thousands of Britons who, often for no fault of their own, could begin 2021 as "subprime" borrowers if they have had more than six months' of relief from COVID-19 debt woes.
This could have dire consequences for people who have historically struggled to access credit, especially those on low incomes.
The situation also illustrates the unenviable dilemmas facing authorities around the world who have taken unprecedented steps to keep societies intact during the pandemic, including requiring lenders to offer customers payment holidays.
Yet fearing people will spiral ever-deeper into debt, leaving banks with deep losses, regulators are paring back those financial lifelines, even as COVID-19 rages anew and some vulnerable citizens despair how they will stay afloat.
Britain's first lockdown began in March and authorities allowed borrowers to suspend payments on mortgages and loans from April 9, without their credit rating being affected, to help ease the distress caused by tumbling wages and job cuts.
Policymakers have put a six-month cap on the credit amnesty, just as a second lockdown in England poses many of the same problems for businesses and households.
Individuals can apply for a loan payment holiday until March 31, but those requiring additional breathing space or more bespoke debt relief could see themselves rated subprime, making accessing credit tougher or even impossible, according to about half a dozen industry players interviewed by Reuters.
"People who need continued help could find themselves in a precarious financial situation," said Justin Basini, CEO of credit marketplace ClearScore, who estimates tens of thousands of borrowers could be affected from the new year onwards.
The number of people in severe problem debt has risen to 1.2 million due to the pandemic, with a further 3 million at risk, charity StepChange warned last week.
Around 12 million people, meanwhile, have "low financial resilience" and may struggle with bills or loan repayments, the Financial Conduct Authority (FCA) said last month, with 2 million having entered this category since February.
RAIDING RETIREMENT POT
While those already in financial trouble before the pandemic are likely to be worst affected, the squeeze is also hitting people formerly viewed as highly creditworthy.
Take Julia McPherson, a 55-year-old entrepreneur from Suffolk, eastern England.
She had always counted herself "one of the lucky ones".
Her successful ventures helped her buy a family home with a small mortgage, which she later used as collateral to fund renovations.
She poured 100,000 pounds ($132,250) of savings into plans to launch a glamping business, Yology, in spring but the mother-of-four ran into difficulty shortly before the loan-payment freeze and credit-rating amnesty were launched.
With her income so uncertain, she felt she had no option but to cancel March and April payments on a 70,000-pound second mortgage loan and a 20,000-pound car loan.
Despite raiding retirement savings to pay the arrears in May, McPherson's credit score tumbled from a near-perfect 997 in January to a "very poor" 296 in July on a scale devised by Experian, a leading scoring agency.
She is slowly rebuilding her score but the hit means she can no longer borrow at rates she considers fair or affordable.
"Unless you are extremely wealthy, you're only ever one or two months away from debt," said McPherson, who criticised lenders for denying customers access to low-interest rate loans as the pandemic continues.
"This is now true of a very large number of people who have been badly hit by an unexpected external crisis they had no way of preparing for."
SUBPRIME LOANS DRY UP
The FCA referred queries to previous statements where it said limiting the credit amnesty was aimed at protecting consumers.
Borrowers can still ask lenders to restructure mortgage payments beyond six months but such requests may impact credit files, the regulator warned, with a return to accurate reporting viewed as necessary to prevent over-indebtedness and ensure lenders remain confident to lend.
The FCA did not formally consult on the plan to limit the amnesty, but a call for feedback in September drew support from most companies and trade bodies who were in favour of restoring normal credit file reporting.
According to ClearScore though, consumers' credit scores with Equifax - another credit-reporting agency - could drop by up to 124 points if they find themselves unable to repay debt for three consecutive months outside an agreed payment holiday.
A drop like this would likely trigger a credit file "black mark", making accessing credit almost impossible, Basini said.
The average UK Equifax credit score is 380 points, and considered "fair" but a drop of just one point would put borrowers in the "poor" range of 379 to 280.
A drop to poor often means borrowers must turn to subprime lenders, which typically charge higher interest rates to offset a perceived higher default risk - but even that's drying up.
Subprime lenders like Provident Financial, Morses Club, Non-Standard Finance and Amigo either tightened lending criteria or shut the doors to new business early in the pandemic. Amigo has said it will not resume new lending until next year.
"I expect the number of non-prime customers in the UK to grow from 10 million to 12 to 13 million next year," Morses Club Chief Executive Paul Smith said. "There's a lack of supply to meet the growing demand, and I think it will get worse."
An Equifax spokeswoman said they worked closely with all organisations that supply data to ensure it is accurate and fit for purpose, adding banks made lending decisions on a range of information gathered and not just credit scores from agencies.
A spokesman for Experian said it expected lenders to report assistance offered where relevant, after six-month payment holidays expired.
"It's a return to business-as-usual credit reporting and scoring," he added.
THE SHARKS CIRCLE
Debt campaigners say the amnesty ended too soon.
With banks likely to refuse or price out poorer borrowers who fall outside risk appetites, there are few alternatives, particularly since a no-interest loan scheme proposed by the government in 2018 is still pending.
Fears of a loan-sharking, or illegal-lending, boom prompted the government's England Illegal Money Lending Team to launch a smartphone app in September to help people report predators who demand extortionate interest or threaten borrowers.
Lenders also expect secured and unsecured consumer loan default rates to rise in the final quarter, Bank of England data on Oct. 15 showed.
"We have concerns for those whose payment holidays have ended and are unable to resume repayments, as their only option will be whatever their lender offers," said StepChange public policy manager Adam Butler.
And while ending the amnesty is aimed at shoring up the economy, it could have an opposite, unintended, effect.
"With fewer people able to take out credit, buy homes, and switch credit products to pay down debt, this will have a direct impact, not only on consumers, but on the credit industry and the economy as a whole," ClearScore's Basini said.
($1 = 0.7561 pounds)
(Reporting by Sinead Cruise and Iain Withers; Editing by Pravin Char)