Problem debt and low-income households

• Context
• The study
• Key findings
• Points to consider

Context

In recent years there has been a heightened awareness of unsecured household debt (‘consumer credit’) such as credit card debt, unsecured loans and hire purchase agreements. Of particular concern is the total volume of outstanding consumer credit. According to Bank of England measures, total consumer credit in real terms increased from less than £170 billion in 2013 to more than £200 billion in 2017. Keeping up with repayments on consumer credit can place major financial and psychological burdens on households, and can affect their ability to purchase other essential items and pay for fundamental goods and services.

However, sometimes debt can be more positive. Credit cards and loans can be used to meet unexpected expenses and deal with income shocks, while hire purchase and leasing agreements may enable households to access goods such as cars earlier than they would otherwise be able to. These decisions can be logical, and in some circumstances beneficial to households whose income in the future will allow them to meet their repayment commitments without encountering financial distress. It is therefore important to distinguish between the times when incurring debt is a problem and when it is not.

The study

This 2018 report from the Institute for Fiscal Studies, supported by the Joseph Rowntree Foundation and the Economic and Social Research Council, uses data from the Office for National Statistic’s Wealth and Assets Survey (WAS) to build on previous research into problem debt. The WAS is a longitudinal survey that interviews a representative sample of British households on a rolling biennial basis. The analysis uses a range of statistical techniques, including an array of descriptive statistics and regression analysis as well as testing findings for statistical significance. The report investigates the following areas:

1. Context on Unsecured household debt in Great Britain.
2. Defining ‘immediate servicing pressure’, attempting to identify households where meeting debt commitments is putting them under financial pressure.
3. The dynamics of servicing pressure, why it arises and how households can escape from it.
4. A medium-term view of household’s debt positions, looking at whether households will continue to struggle to repay their debts.

Key findings

Context on unsecured household debt in Great Britain

• Around half of all households in Britain in 2012-14 had some unsecured consumer debt. Almost half of this was in the form of formal loans (43%), followed by credit and store cards (25%) and hire purchase agreements (21%).
• While those on lower incomes are less likely to hold unsecured debt, they are more likely to be in ‘net debt’ (unsecured debts greater than their financial assets).
• More than half of those who were in debt in 2012-14 had debts on all four occasions they were interviewed (spanning six years).
• While debts can be a sign that households are struggling, they can also be a suitable response to negative financial shocks or an anticipated increase in income.

Debt servicing pressure

• The proportion of individuals spending more than a quarter of their income on servicing unsecured debt is similar throughout the income range.
• Being in arrears is highly-concentrated among low-income households (16% of those in the lowest income decile compared to 1% in the highest decile).
• Adults with lower levels of education are more likely to face servicing pressure than those with higher levels.
• Almost two-thirds (64%) of the lowest income decile had financial assets worth less than half of their debts, compared to 29% in the highest income decile.

The dynamics of servicing pressure

• Low-income households are more likely to enter servicing pressure than those with higher incomes, and it is more likely to be explained by a rise in debt servicing costs than by a fall in income.

The medium term

• When considering whether unsecured debt may pose problems, it is important to consider not just servicing pressure but also whether unsecured debts will be a struggle to repay over the medium-term.
• Low-income and younger households are more likely to struggle to repay their debts over the longer term.
• Taking account of both future income and that debt can be repaid over time does make repayments look more manageable for some groups.
• Taking account of the fact that some people are only temporarily on low incomes reduces the proportion of low-income households expected to be under repayment pressure.

Points to consider

• Methodological strengths/weaknesses: The methodology used appears sound and the findings are tested for statistical significance, so we can have a fair degree of confidence in the robustness of the findings.
• While methodological details are scarce, much of the analysis presented is from secondary resources that are robust and reliable (for example the Office for National Statistics).
• Generalisability/ transferability: This report is of significant interest to politicians, policymakers and other stakeholders who are interested in understanding problem debt among low-income households.
• Relevance: The findings are situated in the context of Great Britain, though some of the learnings may be transferrable to countries with similar financial regulatory environments.