This article by Damon Gibbson was originally published on the Touch Stone website on 8th September 2015:
Today saw the first release of findings by the Centre for Responsible Credit (CfRC) from the joint TUC and Unison commissioned ‘Britain in the Red’ project. The project is looking at available aggregate and household survey data to track the extent of household over-indebtedness: assessing the economic impacts of consumer credit borrowing and student loan debt and commenting on the types of household that are most affected.
It may seem strange that the TUC and Unison have needed to undertake the project at all. It is, after all, only seven years since the onset of a financial crisis in which high levels of household debt have been identified as both a contributory factor and, according to the Bank of England, are dragging back the economic recovery. But, whilst Government continues to focus on the need to pay down the national debt, it has not published any detailed analysis of household debt since commissioning YouGov to undertake a household survey in 2012. And although the Bank of England commissions an annual survey of household debt (‘the NMG survey’) its analysis of this has tended to focus on the findings about mortgage debt but have largely overlooked the effects of growing consumer credit debt and student loans. The Britain in the Red project is filling this gap.
Today’s publication therefore provides a much needed update concerning the distribution of unsecured debt amongst households since 2012 – a period which saw many households placed under considerable financial pressure due to a lack of real wage growth, welfare cuts, and the rising cost of essentials, especially housing and childcare.
In this context, the headline findings released today are unsurprising. Looking at NMG survey data regarding the distribution of unsecured debts, we report that the number of over-indebted households increased by 700,000 between 2012 and 2014. That’s a 28 percent increase over the period and we estimate that the total number of over-indebted households – who are paying out more than one quarter of their gross incomes to their unsecured creditors – is now 3.2 million (one in eight of all households).
Perhaps more worrying still is the finding that half of all over-indebted households are extremely so – required to pay out more than 40% of their gross income to their unsecured creditors.
Beneath these headlines, we estimate that there have been considerable increases in over-indebtedness amongst younger workers, working households with incomes below £30,000, and the self employed (see table below).
Over indebtedness amongst selected household types, 2012 & 2014 (as percentage of households with unsecured debts)
Moving forwards the project is looking at how this increase in over-indebtedness is acting as a drag on the economic recovery, by depressing household spending.
Initial findings indicate that whilst there has been a significant growth in student debt since the increase in tuition fees to £9,000 in 2012 this has not been behind the growth in over-indebtedness. This is because the lower interest rates charged to student debt, and the fact that payments are only required once certain income thresholds are exceeded, limits the impact of these on the debt servicing ratio of households (i.e. there percentage of gross income going on debt repayments). In contrast, there has been relatively little success in bringing down the interest rates charged on credit cards, overdrafts, and personal loans since 2008 despite base rates falling to the floor. And there are no systematic protections for debtors whose real incomes erode to inadequate levels and who have outstanding consumer debts.
As credit card borrowing is the major component of debt amongst this group, changes in the average repayment requirements of these have a much greater impact on overall debt repayment ratios. In addition to the fact that interest rates on credit card balances have stayed stubbornly high (at between 17% and 18%), it should be noted that Government introduced new rules for credit card lenders in January 2011. These required lenders to raise the minimum monthly repayments on new credit cards. The rules ensured that minimum monthly repayments covered the interest on the outstanding balance plus at least one percent. The impact of this change has taken time to be felt as it did not apply to existing cards, but has impacted on people who transferred their balances from January 2011 onwards as well as borrowers who took out new cards from that point.
We will therefore be looking at how over-indebted households can be identified by lenders and provided with greater assistance, including the potential for requiring lenders to reduce interest charges or freeze repayments if income falls below certain thresholds in the same types of ways that apply to student loans.
As the project moves forward we will also be looking at the impact of the growing debt collection industry. This purchases unsecured debts from originating lenders at low prices (often just several pence in the pound) but then pursues households for the full nominal level of the debt. This sector seems to have little or no economic benefit, with the debts being collected already having been written off on bank and building society balance sheets against their tax liabilities. Yet the size of the sector is large, and their collections reduce the ability of households to maintain spending in other areas.