The next cost-of-living shock: six actions creditors should take now

Why it matters for creditors

Creditors often identify distress through lagging indicators: missed payments, broken arrangements, arrears ageing, returned direct debits, contact avoidance or explicit customer disclosure.

Those indicators remain important, but they are no longer enough.

In a layered cost-of-living environment, customers can move from "coping" to "struggling" quickly. Some will continue making payments in the short term by cutting back on essentials, using further credit, missing other commitments or avoiding contact. By the time arrears become visible, the opportunity for a sustainable early intervention may already have narrowed.

For regulated firms, this matters because Consumer Duty requires firms to avoid causing foreseeable harm and to support good customer outcomes. The FCA has also been clear that firms should provide accessible support and act proactively to help borrowers in financial difficulty.

This means creditors should not wait for arrears data to confirm what forward-looking indicators already suggest.

Creditor risks are broader than rising arrears

Whilst the immediate risk is higher delinquency, the broader picture is a deterioration in customer outcomes, operational control, and evidential confidence.

Creditors may see:

Affordability

Existing repayment arrangements become unrealistic as essential costs rise.

Collections performance

Higher roll rates, more broken promises and lower right-party contact effectiveness.

Customer harm

Customers prioritise creditor payments over essentials or fail to disclose difficulty early.

Complaints

Increased complaints about tone, timing, affordability, vulnerability handling and unsuitable arrangements.

Operational capacity

Uneven spikes in inbound contact, hardship requests, breathing space activity and specialist support needs.

Governance

Difficulty evidencing that foreseeable macroeconomic stress was identified, assessed and acted on.

Supplier oversight

Inconsistent treatment where activity is outsourced to third-party debt collection agencies or legal partners.

As the latest cost-of-living crisis unfolds, the central question for creditors is not whether economic pressure will increase. It is whether operating models are ready to identify and respond to it early enough.

Actions creditors should take now

1: Re-test affordability assumptions

Affordability models, income and expenditure benchmarks, standard arrangement parameters, and settlement strategies should be reviewed against a sustained increase in essential costs.

Creditors should ask:

• Are current repayment arrangements still likely to be sustainable?
• Do affordability tools reflect higher food, fuel, energy and travel costs?
• Are customers on marginal disposable income being identified early?
• Are arrangements being reviewed at the right frequency?
• Are front-line teams empowered to vary, pause or reset arrangements where circumstances change?
• The aim should be to prevent arrangements that look acceptable on paper but are likely to fail in practice.
• 2: Re-segment customer risk
• Traditional segmentation based on arrears stage, balance, product type or contact history may not be sufficient. Creditors should overlay additional indicators of financial resilience.

Priority segments may include:

• customers with recent broken arrangements
• customers making minimum or token payments
• customers with previous vulnerability or financial difficulty markers
• customers with high essential expenditure exposure
• customers recently cured from arrears
• customers with multiple accounts or multiple creditors
• customers in sectors or regions more exposed to travel, fuel or energy costs
• Segmentation should be used to drive treatment, not just reporting.
• 3: Move intervention upstream
• Creditors should bring forward supportive engagement before customers miss payments.
• That does not mean increasing pressure. It means creating earlier, lower-friction opportunities for customers to tell the firm if their circumstances have changed.

Practical steps include:

• softer pre-arrears contact for higher-risk segments
• proactive arrangement reviews
• digital self-serve income and expenditure refreshes
• clear signposting to support options
• improved vulnerability prompts
• earlier referral to specialist support terms or free debt advice where appropriate
• The tone is critical. Early engagement must feel supportive, not like accelerated collections activity.
• 4: Make forbearance more adaptive
• In a prolonged shock, one-off solutions will not be enough; creditors should review whether their treatment strategies allow for temporary, proportionate, and repeatable support.

This may include:

• short-term payment reductions
• breathing space before enforcement escalation
• temporary holds where circumstances are unstable
• realistic repayment resets
• better review points
• clearer exit routes from temporary support
• differentiated strategies for temporary shock versus structural affordability issues.
• The objective is not to defer risk indefinitely. It is to create sustainable outcomes and reduce avoidable failure.
• 5: Prepare operations for uneven demand
• Customer deterioration will not occur evenly. Some portfolios and segments will be affected sooner than others.

Creditors should stress-test:

• contact centre capacity
• hardship and vulnerability team demand
• complaint volumes
• breathing space and debt advice referrals
• quality assurance capacity
• supplier performance

MI and daily operational oversight

Waiting until arrears volumes rise will leave too little time to respond.

6: Strengthen governance and evidence

Boards, executive teams, and collections leaders should be able to evidence that they considered the foreseeable impact of sustained cost increases.

That means documenting:

• the scenarios considered
• the customer segments assessed
• the treatment changes made
• the rationale for affordability assumptions
• the MI used to monitor outcomes
• the approach to vulnerable customers
• the controls over outsourced collections activity
• In the current environment, good governance is not just having a policy. It is being able to show how judgement was applied as customer risk changed.

What good looks like from here

The organisations that respond best will act before arrears data fully reflects the shock. They will use forward-looking insight, adapt treatment strategies early, and leave clear evidence that customer outcomes and operational resilience were considered together.

How arum can help

We help creditors strengthen collections, recoveries and customer treatment in regulated environments. The work usually covers six things.

• Portfolio impact assessment: which customer segments are most exposed to faster deterioration.
• Affordability framework review: whether current income, expenditure and arrangement policies still hold.
• Collections strategy design: treatment paths, contact strategies and forbearance built around earlier intervention.
• Operating model readiness: capacity, roles, controls, supplier hand-offs and specialist support.
• Consumer Duty evidence: MI, decision records and assurance materials that show foreseeable harm was managed.
• Technology and data: turning strategy into system rules, workflow changes, segmentation logic and dashboards.

If you want to talk through a cost-of-living action plan, or another part of your operation, we would welcome the conversation.