The paper examines the evidence on the links between problem debt, consumer credit use and poverty to better understand how tackling problems in relation to debt and credit use can contribute to combating poverty. It draws on a research review conducted for the Joseph Rowntree Foundation as part of its programme to produce an anti-poverty strategy for the UK, as well as a wide range of other evidence.
To what extent are credit use and problem debt a cause or a consequence of poverty?
- The hypothesis that poverty causes problem debt and problem credit use is that without sufficient income households fall into arrears on bills and other payments and in order to meet their needs may resort to using credit.
- The hypothesis that problem debt and credit use can cause poverty is that use of consumer credit, particularly high-cost credit, overstretches households causing financial difficulty and over-indebtedness.
The results are summarised as follows::
Is poverty a cause of problem debt? The authors do find evidence to support the hypothesis that poverty is a cause of problem debt. For some people, problem debt is the result of a single specific event, such as losing a job or starting a family, but for others use of credit and the accumulation of debt are due to persistent low levels of income.
Is problem debt a cause of poverty? The authors were unable to find any robust evidence to show that problem debt directly causes poverty. The findings do, though, suggest that problem debt can exacerbate and deepen the experience of poverty.
Is consumer credit a cause of poverty? The authors find a strong link between the use of consumer credit (in general) and being in financial difficulty but, due to a lack of evidence focusing on poor or low-income households and a lack of longitudinal quantitative evidence, argue that it is not possible to confirm a causal relationship between consumer credit and poverty. For many people, the benefits of credit outweigh the costs, but for others, use of (high-cost) credit is detrimental and can also trap low-income households in a cycle of credit dependency.
1. Adequate incomes: given that the evidence suggests that problem debt is likely to be a consequence of low income, rather than the other way round, a key priority for an anti-poverty strategy for the UK is to ensure that people have adequate incomes, in and out of work.
2. Affordable credit: While there was no evidence to confirm a causal relationship between poverty and credit use, for those who need to borrow, increasing the availability of affordable credit will reduce the cost of meeting essential needs, compared to using high-cost credit.
3. Emergency grant scheme: An emergency grant scheme is recommended for inclusion in an anti-poverty strategy, to enable poor households to meet essential needs without their financial circumstances worsening.
4. Debt advice: An anti-poverty strategy should include a commitment to providing access to debt advice that is impartial and free at the point of use. While there is no evidence that debt advice helps lift people out of poverty (or prevents them falling into poverty), studies of free-to-user debt advice services show a range of positive outcomes that may help mitigate the impacts of poverty.
Points to consider
Methodological strengths/weaknesses: There are no details given of the approach taken to the review, so we can’t know if relevant papers have been omitted. However, there are around 50 papers cited, from a wide variety of reputable sources such as Citizens Advice, Department for Work and Pensions, and the Money Advice Service, so the study appears thoroughly researched.
Relevance: The report draws on sources that are still relatively current, most having been written since in the last two decades. The issue of credit use is particularly timely following the coronavirus pandemic as many people have suffered income shocks.
Generalisability/ transferability: Most of the papers cited are UK based, but the relationship between credit use, debt and poverty is likely to hold true in other countries, especially those where the credit market is similar to that in the UK.
- This report is applicable to anyone with an interest in credit use or in poverty, such as credit providers, government, support agencies, policy makers, policy implementers, regulators or educators.