From the TUC

6 million Britons using credit to last until payday

07 Nov 2014, by in Economics

The other side of unemployment, underemployment, low pay and poverty is debt. Yesterday the debt charity StepChange hosted an event for individuals and organisations involved in dealing with the many consequences of this huge social (and economic) issue. The scale of the problem is increasingly recognised by the media and campaigners, but the facts are worth re-iterating:

  • 2.9 million people are in what they call ‘problem debt’, 6 per cent of the adult population
  • For StepChange Debt Charity clients, the average unsecured debt (i.e. not mortgage debt) is £16,000 per household
  • 6 million adults are using credit to last until payday
  • 3 million adults are using credit to keep up with existing credit commitments
  • 1 ½ million adults are taking advice, and StepChange take 1500 calls every single day

According to my maths, and if StepChange clients are representative of all those in problem debt, 2.9 million multiplied by £16,000 is nearly £50 billion of problem debt. The National Accounts balance sheet for the household sector suggest that total unsecured debt is around £250 billion (Blue Book, Table 6.1.9). Bank of England figures show consumer credit cards and other loans and advanced account for £165 billion (Money and credit release, table K). I don’t know what the relevant figure is, but the suggestion is that between 1/3 and 1/5 of unsecured debt is problem debt.  Either way, the scale of the numbers is staggering.

In addition of course, these loans are increasingly going outside the conventional banking sector. StepChange statistics inevitably show the use of payday lending on the increase, quadrupling in size over 2011 to 2013. The chart below is borrowed from their statistics page:

debt1

 

Finally it is very important to understand that this debt is primarily because of hardship not conspicuous consumption. 

 

debt2

 

StepChange are careful to create an environment where people are not afraid to come forward to face up to their debts, and that there is a way out (they changed their name from Consumer Credit Counselling Service). They work too and receive voluntary donations from the banks, so while it was unsettling that the event was held at Barclays in Canary Wharf, the banks increasingly recognise that it’s better for people to get advice early and pay back their debts at an affordable rate. They desperately want individuals to steer clear of debt management companies, who entice debtors with the promise of lower monthly payments, but the reality is a large slice of commission, higher interest and longer periods of repayment as well as limited sympathy for individual plight. Though sadly StepChange also note that the most unsympathetic creditor is, in some cases, local government. 

They too, desperately want the Government itself to take an interest, but they have not yet stepped up to the mark. StepChange have a five point plan for what government should do, underpinned by the state providing a statutory scheme for people in financial difficulty. The proposals seem undeniable.  Though some might wonder whether it is time to consider debt forgiveness.

I have left aside the macro side, assuming the new financial authorities are on the case. I have no idea whether the figures above conform with existing estimates of the threat of bad debt to banks’ balance sheets. Someone mentioned that even rescheduled debt can be at around ten per cent interest, a significant drain on household consumption as well as everything else.

There is here a major crisis of a scale that may not be fully appreciated, the endgame (perhaps) of years of reckless lending by banks now compounded by a ‘recovery’ which for most is delivering no increase in real income and no hope for the future.