Standstill wages mean over a million low-income families struggle with extreme debt
Today saw the publication of our (The Centre for Responsible Credit) final report from the joint TUC and Unison commissioned ‘Britain in the Red’ project. The project has been looking at available aggregate and household survey data to track the extent of household over-indebtedness: particularly assessing the economic impacts of consumer credit borrowing and commenting on the types of household that are most affected.
Our analysis indicates that there have been significant increases in over-indebtedness amongst lower income, working households, in recent years.
- 3.2 million households are in ‘problem debt’ – defined as paying out more than 25% of their gross household income on unsecured debt repayments (3.2m is equivalent to 1 in 8 households.)
- 1.6 million households are in ‘extreme problem debt’ – defined as paying out more than 40% of their gross household income on unsecured debt repayments (1.6m is equivalent to 1 in 16 households.)
It is estimated that 1.2 million of those in extreme problem debt have a household income below £30,000, and extreme problem debt is growing particularly quickly for low income households in employment. In 2015 9% of low income households in employment were in extreme problem debt, up from 5% in 2014.
Although historically low base rates have reduced the cost of servicing mortgage debt, our analysis shows that the burden of consumer credit debt has never been greater. This is because:
- The amount of consumer credit held by households has not significantly reduced since the financial crisis. Consumer credit debt initially fell back from its 2008 peak of £230 billion to £184 billion in 2012. However, these liabilities have since risen, and stood at £212 billion as at the end of 2015. The Bank of England report that consumer credit lending is now growing at an annual rate of over 10 percent, the fastest rate for a decade. Over the past seven years there has therefore been a reduction in consumer credit debt of just 7.8 percent;
- The interest rates on that debt, and particularly on credit card debt, have not significantly reduced despite the low base rate environment. Although there has been some reduction in the rates charged on personal loans, average credit card rates for balances not repaid at the end of the month rose from 13.7 percent in November 2003 to 18 percent five years later, and have stayed at around that level ever since. We estimate that households are being charged around £25 billion per year in interest payments on their consumer credit debts, which is equivalent to around 1.4% of GDP;
- Because wages have not kept pace with the cost of living, households have less available money from which to meet the cost of their consumer credit debts. Conventional measures of the cost of servicing debt, which only look at the level of interest payments relative to gross incomes, do not take into account the rise in the cost of living since 2008. Once this is factored in, it is apparent that the consumer credit debt burden has never been greater (see figure, below).
On this measure, the consumer credit debt burden is at a record high of 18.2%. This is unsustainable, and policy-makers urgently need to develop a strategy to reduce it.
Most obviously actions are needed to strengthen household incomes through higher wages. These should follow from actions to strengthen the economy, including increased infrastructure spending and the development and implementation of an industry plan. On top of this, direct action must be taken on indebtedness, working to reduce the interest rates being charged on the mountain of long-term consumer credit debt that is outstanding, and helping the most over-indebted households to write off or reschedule a proportion of their debt.
Relying on our existing insolvency and debt advice system is not an adequate response to the growing debt burden. Traditional debt advice does not offer any element of write-off, and our insolvency procedures (which include Bankruptcy, Individual Voluntary Arrangements, and Debt Relief Orders) have proved themselves incapable of helping sufficient numbers of households in recent years. As above, we estimate that around 3.2 million households (containing 7.6 million people) are currently paying out more than a quarter of their income on consumer credit debt repayments. These figures are consistent with the StepChange ‘Life on the Edge’ report, published in 2014. StepChange are a debt charity, who give ‘free advice on problem debt based on what’s best for you’. In spite the scale of these figures, and those for extreme problem debts, in the past year fewer than 80,000 people have entered insolvency – largely because these processes have poor eligibility criteria, pose a risk that people will lose their homes, and are often expensive to access.
In our view, Government should consider the abolition of Bankruptcy and Individual Voluntary Arrangements and replace these with a single procedure which is cheap to access, protects the main home of debtors to a reasonable value, and provides for a fresh start within a reasonable period. The limited disposable income threshold, of just £50 per month, which is a condition for people who have no assets to obtain a Debt Relief Order should also be significantly increased, and the upper limit on the amount of debt that can be included within these should be removed. It makes no sense whatever that the poorest households with the highest levels of debt are excluded from that procedure.
There is also a strong case for ensuring that less formal ‘debt management plans’, which are often put in place by advice agencies, provide for at least a partial write off of debt. This is because it is likely that a large proportion of the debts included in these plans have been written off for tax purposes by the originating lenders and sold onto debt recovery companies for a fraction of their face value. Recovering these debts in full serves no real economic purpose.
More pro-active identification of over-indebted households is also needed. Lenders and credit reference agencies need to do more to identify these households and target them with a new offer of assistance, which should include reduced interest rates and an element of debt write off. For example, in its recent credit card market review, the Financial Conduct Authority has identified that 2.1 million people, predominantly from lower income households, have maintained a balance of over 90 percent of their credit card limit for over 12 months. It also found that 5.1 million accounts will, on current balances and repayment patterns, take over 10 years to pay off. These debtors are good candidates for help, and a package of support for them now needs to be designed and implemented.
 Calculated by taking estimated interest payments as a percentage of the difference between income and non-debt related spending, presented on a rolling 4 quarter basis.