Debt fears for poorer households

credit cardsImage source, Getty Images
Image caption,

Credit cards can charge interest of 20% a year

A third of the lowest-income households in Britain have loans and credit card debts that outstrip the assets they hold, research has found.

This debt can become a problem to repay, even if the total amount borrowed is relatively low.

The Institute for Fiscal Studies (IFS) analysed official figures to estimate the extent of unmanageable debt.

Unsecured borrowing, such as loans, overdrafts and credit cards, has been rising by nearly 10% a year in the UK.

The IFS found that a quarter of very low-income households have high debt repayments or are behind on bills or repayments.

Helen Barnard, from the Joseph Rowntree Foundation, which commissioned the report, said: "The government, regulators and lenders need to not only look at increasing access to affordable credit, but also at the financial pressures that can lead families to take on debt in order to get by."

The report found that about half of British households have some unsecured debt.

Some 43% of this is loans from banks and other financial institutions, with credit and store card debt (25%) and hire purchase debt (21%) the other major contributors.

The majority of this debt could be paid off, the report found.

"More than 60% of unsecured debt is held by households with above-average incomes, and more than half of households with unsecured debts have more than enough financial assets to pay them off," it said.

Image source, Getty Images

The problems emerged, it said, for households that were already behind on making debt repayments or that spent a large amount of their income on servicing debts.

The report suggested:

  • Young adults aged in their 20s were more likely to be in households with problem debt than older people

  • Low-educated young adults were particularly likely to be struggling

  • Debt problems tended to be more persistent for low-income households

"Debt looks like a real problem for a significant minority of those on low incomes, who are not keeping up with bills and, or, spending high fractions of their disposable income on debt repayment," said the author of the IFS report, David Sturrock.

"Headline numbers are no guide to the scale of problem debt. Distinguishing between debts that are entirely appropriate and those that look unmanageable is crucial."