The Institute for Fiscal Studies (IFS) last month released figures showing that one quarter of Britain’s poorest households are falling behind with debt payments, whilst spending more than a quarter of their monthly income on debt repayments.
The report was commissioned by the Joseph Rowntree Foundation, at a time when debt incurred on credit cards, loans and car finance deals returned to levels unseen since before the 2008 financial crisis.
The figures show that the poorest 10% of households are more likely to be in debt; to owe more on credit cards or overdrafts and loans than they hold in savings. It shows around one third of the poorest homes are in net debt, compared with only 10% of the highest income tenth.
In short, debt appears to be a real problem for a significant minority of households on low incomes.
As I have commented previously in blogs the Bank of England has become increasingly concerned about the rapid growth in unsecured borrowing and debts in the UK. Debt incurred on car finance has driven much of this growth, while the overall debt pile including credit cards and personal loans has now reached more than £200 billion.
The study did find that more than half of households have enough money in savings to pay off their debts, as they choose to borrow despite having cash left in reserve. More than 60% of all unsecured debt was taken out by households with above average incomes.
However, debt for the poorest households can prove more of a problem and is of growing concern to the Financial Conduct Authority. Of the poorest 20% of households who are in arrears with debt or spending more than a quarter of their income on debt repayments and charges in 2010, more than 40% were found to be stuck in a similar position two years later. This shows just how difficult it is to get out of “problem debt” once it has taken a hold on a household.
According to the Money Advice Service there are now over 8 million people in the UK with problem debt. Households, as we know, are facing a year of static pay growth and a reduction in net wages as inflation outstrips wage growth. This may well push people further into debt to service their needs.
The IFS study found that more than one in five households on low incomes have problem debts, compared with just one in twenty people having debt problems at the top of the income scale. It found that on average, the poorest 20% paid over £450 a month on paying back their debts out of an income of just over £1,000.
Analysis by the Bank of England and the FCA this month showed it was not uncommon for people to remain in debt even after paying off one of their credit cards, as debt will simply shift from one lender to another. The analysis also found that £9 out of every £10 of outstanding credit card debt in November last year was owed by people who are also in the red two years earlier.
If you have found yourself struggling with debt you no longer feel able to pay back you should speak to an experienced insolvency solicitor who can explain your options. Call 0845 287 0939 or submit your enquiry online.