Low-income households have seen the fastest rise in the use of consumer debt since the financial crisis, and are too exposed to financial shocks, according to new research published by the Resolution Foundation. The ‘An outstanding balance?’report explores changes in the use of consumer debt – including credit cards, store cards, mail order and hire purchases, and car finance – over the past decade, including where it has grown fastest, and what it means for households’ financial resilience.
The report notes that common fears of another debt-fuelled financial crisis are overblown. Overall consumer debt levels remain significantly below pre-crisis levels (15 per cent of total income last year, compared to 19 per cent in 2008), while historically low interest rates have driven down the cost of debt. For example, the average rate for a two-year variable rate 75 per cent LTV mortgage fell from 6.1 per cent in April 2008, to 1.4 per cent in April 2017.
However, this does not mean that policymakers should relax about household debt, says the Foundation. Instead, they should focus on the rising use of consumer debt among potentially vulnerable groups, and the types of credit they are using.The report finds that the proportion of low-income households using some form of consumer debt rose by 9 percentage (from 53 per cent to 62 per cent) between 2006-08 and 2016-19 – a far steeper than the 1 ppt rise (to 64 per cent) among high-income households.
This rising use of consumer debt has been concentrated in products with high-interest rates that have not got cheaper over the past decade (unlike mortgage debt, which low-income households are less likely to have taken on).
Credit card use (with an average quoted interest rate today of 20 per cent, up from 15 per cent in 2008) among low-income households grew by 13 ppts between 2006-08 and 2016-19. The use of overdrafts (with an average quoted interest rate of 15-20 per cent) grew by 4 ppts.
The Foundation says that a decade of falling interest rates has not seen falls in low-income households’ exposure to debt, not least given the wider squeeze on incomes during this period. Typical debt repayments as a share of income have remained at around 8 per cent since the financial crisis – three times higher than it is for the richest fifth of households.
This, combined with a 15 percentage point rise in the share of low-to-middle households who have no savings, leaves them far too exposed to future financial shocks.
The report notes that already more than half (53 per cent) of low-income households with consumer debt reported difficulties in meeting accommodation costs in 2016-19, up from one-in-three households in 2006-08. These difficulties are more than twice as common in low-income households that have consumer debt compared to those that don’t (53 per cent vs 22 per cent).
The Foundation says that greater access to consumer credit can be an important benefit for low-income households, though the kinds of debt households are taking on needs closer scrutiny. This is especially true when debt repayments are combined with rent or council tax arrears, and a lack of savings for families to fall back on – which together can test a household’s financial resilience.
Kathleen Henehan, Policy Analyst at the Resolution Foundation, said “Britain is a long way from the levels of debt that drove the financial crisis, despite repeated claims to the contrary. Falling mortgage costs have also reduced the costs of debt for many, mainly higher income families. However, the use of often high-cost consumer credit has risen over the past decade, particularly among low-income households.”
“Access to new credit can be hugely beneficial for low-income families, but with many also reporting that they have no savings to fall back on, these high debt repayment pressures are a sign of stretched living standards.”
“The risk is that this leaves them far too exposed to future financial shocks, reinforcing the need for policymakers to focus on the living standards of those on low and middle incomes.”
Paul Went, Managing Director for Shawbrook’s Consumer Division, said: “The main reason that many low-income families fall into extreme indebtedness is mainly due to not being fully aware of what they’re getting into.”
“If lenders, and particularly credit card providers, were more upfront and transparent in relation to their propositions, then maybe those within low-income households would be able to properly assess these offerings before applying for a product and then subsequently entering into an agreement with an absurdly high APR.”
“The report from the Resolution Foundation highlights the need for lenders to take more responsibility regarding educating consumers, helping them make the correct decisions before jumping in on a deal that fundamentally may not be right for them or their situation.”
“When it comes to personal loans, we believe in being transparent and fair with everyone that applies by providing a clear picture of the rate they’ll get, right from the outset. Although this report is concerning in several areas, it does highlight an area of improvement and increased responsibility for lenders that we fully support.”