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Most household debt looks ‘manageable’ – IFS

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16/01/2018
Most household debt looks manageable, finds a report from the Institute of Fiscal Studies, but a quarter of very low-income households have high debt repayments or are behind on bills or repayments.

The report showed over 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.

However, the report also showed some households struggling. Around one sixth of the lowest-income tenth of households are in arrears on repayments or bills and 10% are spending more than a quarter of their income on debt repayments.

The report, funded by the Joseph Rowntree Foundation and the IFS Retirement Savings Consortium, looked at data on the debt, assets and incomes of households between 2006-08 and 2012-14, to provide insight into whether debt has the potential to be a problem for households. Consumer debt levels have increased since 2017, and therefore the picture may not be fully representative.

Around half of households in Great Britain have some unsecured consumer debt. Almost half of this is loans from banks and other financial institutions (43%), with credit and store card debt (25%) and hire purchase debt (21%) the next most significant.

One in ten households has more than £10,000 of unsecured debt. Those with lower incomes are less likely to hold debts, but are more likely to be in ‘net debt’ – with debts of greater value than their financial assets (e.g. savings accounts). Debt problems are also more persistent for low income households. Over 40% of those in the poorest fifth of households who were in arrears or were spending more than a quarter of their income on debt servicing in 2010-12 were still in a similar position two years later.

16% of those on the lowest incomes are in arrears, compared to only 1% of those in the highest income bracket. The young are particularly vulnerable, with 16% of 25-29 year olds in arrears or spending a large fraction of their income on debt, compared to just 3% of 75-79 year olds.

David Sturrock, a research economist at the IFS and an author of the report, said: “Most unsecured debt is held by high income households who look able to manage it, and more than half of those with debts have enough financial assets to pay them off. But 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. 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.”

Gillian Guy, Citizens Advice chief executive, said: “Borrowing can help people manage unexpected expenses, but stretched household budgets mean some people are taking on debts they cannot afford just to make ends meet.

“People can be pushed further into debt by irresponsible lending practices such as credit card companies handing people credit limit rises they’ve not asked for, or rent-to-own and other high-cost creditors that lend to people who can’t afford the repayments.

“We must do everything we can to stop expensive credit dragging people into a debt spiral, which is why the Financial Conduct Authority should cap all forms of high-cost credit so no one pays back more than twice what they borrowed.”

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