Tighter lending conditions over the last two years have impacted poorest families the hardest, resulting in many falling behind on priority bills like gas and electricity.
An estimated one in eight of the poorest fifth of families have been rejected for credit in the previous 12 months, analysis by Resolution Foundation revealed.
Its In Too Deep? briefing note suggested that, despite the financial pressures faced by households over the past few years, British families today have less consumer debt relative to their incomes than at any point since records began in 1999.
The lower share of income spent today represents a saving of £1.8bn on the UK’s annual consumer debt interest bill versus pre-pandemic levels.
The think tank suggested that had the UK’s debt-to-income ratio remained at its pre-pandemic level, the stock of consumer debt today would be £48bn higher, or around £1,700 per household.
Tighter lending conditions
While this is positive, showing household resilience in the face of multiple and enormous economic shocks, the authors Felicia Odamtten and Simon Pittaway said part of the reason behind this is that lenders have made it harder to access credit over every quarter since mid-2022.
But with firms tightening their belts when it comes to lending, the impact won’t have been felt evenly across income groups.
Tighter credit scoring criteria are more likely to prevent poorer borrowers from accessing credit than richer borrowers. In turn, it has led to a rise in those falling behind on “high-stakes” priority bills such as gas and electricity.
Indeed, data from energy regulator Ofgem indicated that the number of accounts behind on utility bills has reached the highest level since records began in 2012.
Meanwhile, the average amount owed by those in arrears has increased 51% between Q2 2022 and Q3 2023.
The other knock-on effect of tighter lending criteria is that nearly one in 10 have had to resort to informal or unlicensed lenders to cope – a strategy that carries a high level of risk due to a lack of regulation and protection.
Shift in consumer debt to priority debt
Resolution Foundation said “debt problems seem to be shifting from consumer debt to priority debt rather than disappearing”, adding that this is “not normal”.
Further, the report authors added that “this is changing the nature of financial hardship for many of the most vulnerable families”.
It cites data from charity Citizens Advice that revealed that, compared to before the pandemic, the average person seeking debt advice today has, on average, almost £1,000 less credit-card debt but over £500 more debt on priority bills like energy, rent arrears and council tax.
As consumer debt becomes increasingly expensive and inaccessible, it said interest-free priority debt “will often be the best available option for families seeking a financial lifeline”.
But with energy, there’s a threat of being cut off, rent arrears can end up in eviction and unpaid council tax can lead to a prison sentence in England.
Debt impact on people’s health and wellbeing
Resolution Foundation said “it’s no surprise” that priority debt is associated with particularly severe impacts on people’s health. It said someone is twice as likely to report feeling under strain if they owe money on priority bills, compared to someone who doesn’t.
The report authors added: “Falling consumer debt isn’t just telling us about demand, it’s also telling us about its increasingly restrictive supply. Meanwhile, priority debt is an increasingly common release valve for under pressure families, with serious implications for their health and wellbeing. If we want to avoid a repeat in future, it’s time to get serious about policies to help families to build up the financial resources they can fall back on in tough economic times.”
They concluded: “We should be positive that, despite tumultuous economic times and a huge rise in interest rates, we haven’t seen an increase in the burden of consumer debt. This is definitely not a universally sanguine story, however: falling consumer debt is at least partly about a lack of availability of credit for those on lower incomes, and priority debt is an increasingly common release valve for under-pressure families, with serious implications for their health and wellbeing.”
