Households continue to borrow and increasingly falling into debt

As households grapple with the rising cost of living, the latest update to Lowell’s Financial Vulnerability Index (FVI), a tool used to measure and track financial resilience across the UK based on anonymised data from over 9.5 million Lowell customer accounts and other publicly available data, has shown that households are continuing to borrow and are increasingly falling into debt.

The figures show that financial vulnerability is slowly returning to pre-pandemic levels with households’ financial health improving since the beginning of the Covid 19 pandemic while increases in the cost of living appear to be preventing a quicker return to pre-pandemic levels of financial health.

Financial vulnerability fell 6.2 points from 47 in Q2 2020 to 40.8 in Q4 2022 with vulnerability in Q4 2022 wat a level last seen between Q2 and Q3 2019

The share of adults in default is edging up to peak levels last seen at the beginning of the pandemic whilst the proportion of adults in default has risen to its joint highest level since Q4 2019 as households increase expenditure during the rising cost of living. It was found that the share of adults in default in Q4 2022 rose to 12.6% and has been steadily increasing since Q1 2022 with an increase in expenditure likely to drive higher defaults over the long term.

Credit use also remained significantly higher than before the pandemic and remains well above pre-pandemic levels as households continue to borrow, despite rising interest rates, to meet the rising cost of living with credit use in Q4 2022 was 52.3%. Credit use has steadily increased since Q3 2017 and remains well above pre-pandemic levels that were usually below 50%

The research also found that the use of social benefits continues to decline from the pandemic peak with dependence on social benefits continuing to fall from the high levels seen during the pandemic. It remains higher than it was between 2017 and 2019 with the share of social benefits claimants falling by 6.4% from when it peaked at 14.7% in Q3 2020 to 8.3% in Q4 2022.  There was also a decline in claimant count is beginning to plateau at 8.3%, above pre-pandemic levels of under 7%

John Pears, UK CEO at Lowell, said “What this new data shows us is a complex picture of financial health in the UK. Overall it might be getting better, but we’re still miles away from where we were before the pandemic. Dive a little deeper and we can see a range of issues bubbling under the surface.”

“The decline in overall financial vulnerability is important, but it’s still high. Default rates are rising. We need to think about what we’re doing, at an industry and government level, to improve the country’s financial health over the long term. Topics such as teaching better money management, helping people better understand financial products and destigmatising debt all need to be higher on the agenda.”

“As an industry, we are on the frontline of the rising cost of living. By working with the Government and other industry bodies, we can help them fully understand the customer debt journey, ensure the credit system is working in everyone’s interests and address the underlying issues of financial vulnerability.”