Household Debt, Problem Debt, and a Cost of Living Crisis

Household Debt, Problem Debt, & A COST OF LIVING CRISIS

Sian Norris and the Byline Intelligence Team look at rates of debt and problem debt in the UK, as families turn to loans to make ends meet

As politicians scrabble around to find a solution to the cost of living crisis, there has been plenty of talk about the national debt and the burden it places on future generations. 

There has been less talk, however, on how the cost of living crisis is fuelling a household debt crisis, with families struggling to make ends meet turning to credit, payday loans and high interest borrowing in order to make it to the end of the month. 

According to new analysis by the Joseph Rowntree Foundation, the maximum £2,100 per month of Government support– which includes the recently announced energy price freeze – isn’t enough to meet rising energy and other costs for the average household, which are around £2,900.

This leaves a gap of around £800 that low-income families will have to find themselves, including by taking out loans or using credit cards to make ends meet. Already by June this year, 1.3 million low-income households (11%) had used credit to cover essentials.

Little wonder, then, that data from the Joseph Rowntree Foundation found that people on low incomes have taken on £12.5 billion of new private debt in 2022. This represents more than half of the total private debt.

And while that would be concerning in itself, people on low incomes owe a total of £3.5 billion of debt to high-interest lenders and loan sharks, putting them at risk of their debt spiralling or facing punitive sanctions. Arrears on personal debt have almost doubled from £1.8 billion in October last year to £3.8 billion this year. The average credit card debt per household in June 2022 was £2,229. 

The impact of debt is felt differently depending on income levels. While the wealthier households may have a lot of debt – such as a mortgage or student loan – it’s the poorest families who are more likely to find their existing debt “a burden”. Around half of people in the poorest fifth of households describe their debt in this way, compared to one in three people overall. 

It’s no longer a case of putting a luxury item or treat on the credit card either, with families increasingly using credit to get by day-to-day. Unsurprisingly, this is a gendered phenomenon, with women more likely to incur debt in order to pay for everyday necessities. 

According to debt advice provider StepChange, 61% of people getting into debt to purchase everyday items such as food and cleaning products are women – something at risk of getting worse as the cost of living crisis continues. Women are more likely to be living in poverty than men, and are the majority of single parents. More than half of single parent households are in poverty.

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Problem Debt and Inequality

Much of the debt described above falls into the definition of ‘problem debt’, which is when a household has liquidity problems – falling behind on bills or credit commitments for two or more consecutive months.

Between 2018-2020, the Office for National Statistics (ONS) found that 5% of households had problem debt. However, the distribution of problem debt was not equal across regions or income. The ONS found that between April 2018-March 2020, 17% of households with problem debt were in the lowest income bracket, compared to 8% in the next income bracket and none recorded in the top five income brackets. 

Renters were also more likely to be in problem debt: 66% of households with problem debt during the same timescale were in rented accommodation. Only 6% of problem debt was for those who owned their homes outright; 28% was in households with a mortgage or on a help to buy scheme.

Regional disparity exists when it comes to problem debt too, with research from Centre for Cities finding it to be particular issue in Northern and Welsh cities. ONS data states that 6% of households with problem debt are in the West Midlands, and then 5% in the North East, Yorkshire and the Humber, London, and the South West.

The Centre for Cities analysed County Court Judgements (CCJs) to track rates of problem debt. The rates of CCJs grew by more than 110% between 2013 and 2018, with growth concentrated in cities with low average pay and high welfare receipt. Hull had the highest number of CCJs per 100,000 in 2018, along with the lowest weekly resident wages and the third highest welfare bill per person. 

The growth in CCJs has been driven by an increase in smaller claims – 40% are for debts below £500 – and between 2012 and 2018 the number of judgements made against individuals unable to repay debts has increased by 126% to just under 1.1 million. 

While much of this data is from 2018, the conditions that have caused a rise in problem debt and small claims cases continue: sluggish wage growth and the impact of austerity.