They’re a useful tool for all kinds of creditors – and one of the most common ways for clients to make repayments. But in an age where people are struggling to repay multiple debts, are average third party deduction rates doing more harm than good?
Here Peter Tutton, Head of Policy at StepChange Debt Charity, explains why they’re pushing some of the most vulnerable deeper into debt and why his organisation is campaigning to lower the minimum rate to £1.
He says, “Lots of different types of creditors, including utility companies and local authorities, use third party deductions.
As such, there are currently 1.1 million collections being made each month in the UK, including from those in receipt of benefit.
The DWP (Department of Work and Pensions) has set the amount that can be collected at £3.70 per creditor.
That sounds perfectly reasonable – until you realise that there are many people who are paying off multiple debts at once.
For anyone on a low or fixed income paying out, for example three lots of £3.70, can be financially damaging.
In this situation, instead of helping someone repay their debts and become more financially stable, the deduction level can see them being pushed further into financial hardship – impacting on some of the poorest and more indebted in society.
One in ten of those we surveyed have three deductions in place and our recent research found that of those who are having deductions taken from their benefits, 71 per cent feel it is causing their family hardship.
As a result, a quarter have been forced to cut back on food and heating bills to make ends meet.
As a debt advice charity, we are calling for a reduction in the minimum amount that can be deducted, for those on the lowest incomes, and asking that this should be set at £1.
We believe third party deductions should only be used when they are affordable and helpful to the customer, allowing them to keep up with essential bills.
This affordability element is important – helping people meet their day to day expenses is an important part of creating long-term financial resilience.
We would also like to be able to draft new rules on the treatment of vulnerable people and we are suggesting that firms, guided by regulators, should move away from using deduction rates as a benchmark for debt collection.
Working together in this way, to create a fairer, more affordable system will help ensure clients and creditors are able to continue to meet their responsibilities now and in the future.”