human development, social justice and sustainable social systems

Credit should not be a trap

How to prevent over-indebtedness

In the European Union today, almost one in ten people are behind on their rent or mortgage, utility bills or hire purchase. When we consider single parent households with dependent children, the numbers are much higher – as many as one in five. While these numbers have come down in recent years, in line with the overall economic recovery, still too many people in Europe face a heavy burden in trying to make ends meet at the end of every month. And in every EU member state, the debt burden, as a percentage of income, is highest among the poor.

Overindebtedness often begins with financial strain – an unexpected expense caused perhaps by an accident or job loss.  For people living on modest means, a small amount of additional debt can spiral out of control. Loans that were meant as a temporary solution risk becoming a permanent problem.

Overindebtedness can cause intense stress, feelings of shame and even result in social exclusion. This, again, can make finding a solution even more difficult, as the over-indebted fall victim to a sense of hopelessness. Help is what is needed.

How to prevent over-indebtedness

The best solution, of course, is to prevent indebtedness in the first place, for instance by building financial resilience for households. This includes being able to save in ‘normal times’ in order to build up buffers. Yet that is a hard thing to do when you are experiencing poverty. In all EU countries, low-income households manage to save little or nothing for a rainy day, while the richest households on average save about 40% of their income.

So fighting indebtedness is first and foremost about improving the incomes of poorer households. For this, a number of the rights and principles of the European Pillar of Social Rights point the way forward. Effective labour market integration is a cornerstone – we know that quality employment is the best way to lift people out of poverty. At the same time, the Pillar also states the right to guaranteed adequate income support for those in transition or unable to access the labour market. Under the European Semester, the Commission continues to recommend to many Member States to improve the adequacy of benefits.

Just as important is to link these types of support with the provision of quality social services, such as childcare, healthcare and personal counselling. Integrated public employment services and social services are indeed effective in helping overcome the barriers to employment, especially for single parents. The European Social Fund provides 25,5% of its €83.9 billion multiannual budget for combatting social exclusion, including to improve the access to quality social services. Other European funds, like the Fund for European Aid to the Most Deprived (FEAD) support Member States in providing food and basic material assistance to those who need it most.

Another way to prevent over-indebtedness is to ensure responsible lending practices. The 2008 Consumer Credit Directive has led lenders to better assess creditworthiness and introduced important rights for consumers of credit, for example setting limits for how high penalties can be when borrowers want to repay early. This is supported by the national practices of financial regulators in the Member States, whose role is to ensure financial institutions lend in a responsible manner and treat people who fall behind on their repayments fairly and with dignity.

Finally, preventing indebtedness is also about improving people’s basic financial management skills, especially for the low-skilled and the jobless. More can and should be done to bolster financial education among the young, and to ensure that services are in place to help guide vulnerable households into better budget choices. This is something the Commission is already supporting, for instance through modules on financial literacy as part of its Consumer Classroom programme.

Europeans need to be able to borrow – whether to invest in their future or to overcome a difficult life period. But borrowing must not become a trap out of which they cannot escape.

About the author

Joost Korte is Director-General of the European Commission (EC) Directorate General of Employment, Social Affairs and Inclusion (DG EMPL) since 2018.

A Dutch lawyer and former academic, he joined the EC in 1991. He has occupied positions as Deputy Director-General of the Trade Department, Deputy Director-General in the Agriculture and Rural Development Department and at the Enlargement Department.

Mr. Korte also spent several years in the EC’s Secretariat General as Director responsible for the relations with the Council of Ministers.

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Joost Korte

DG EMPL of the European Commission (EC)

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