Most household debt looks manageable – but a quarter of very low-income households have high debt repayments or are behind on bills or repayments

The size of overall unsecured household debt tells us little about how much ‘problem debt’ there is. 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, some households do look to be struggling. About one sixth of the lowest-income tenth of households are in arrears on repayments or bills. An additional 10% or so are spending more than a quarter of their income on unsecured debt repayments, meaning that in total around a quarter of the lowest income households appear to be struggling with arrears or high debt repayments.

These are among the findings of new IFS research, funded by the Joseph Rowntree Foundation and the IFS Retirement Savings Consortium, looking at when and why debt has the potential to be a problem for households. By using data on the debt, assets and incomes of a large representative sample of households between 2006-08 and 2012-14, the research provides new and unique insights into the impact of debt on household living standards.

Key findings on unsecured debt in Great Britain include:

•    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. Debt holdings are very concentrated in the hands of that group of households, who hold 70% of all unsecured household 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). Less than 30% of those in the poorest tenth have debts over £1,000, compared to almost 40% of those in the highest-income tenth. But 35% of the lowest-income tenth are in net debt, compared to only 10% of the highest-income tenth.

Debt is most likely to be an immediate problem when people are in arrears on bills or loans or are using a large fraction of their income to repay debts (we look at those spending more than a quarter of their net income on servicing debts):

•    7% of all households are in arrears on bills or repayments, but that rises to 16% of those on the lowest incomes. By contrast, only 1% of those in the highest income tenth are in arrears.

•    Among those on the lowest incomes 12% are spending more than a quarter of their disposable income on debt servicing. Among the poorest tenth one in four households are either behind on repayments, spending more than a quarter of their income on debt servicing, or both.

•    Young adults are much more likely to be in households that are in arrears or spending a large fraction of their income on debt than older adults: 16% of 25-29 year olds, compared to just 3% of 75-79 year olds.

•    Low-educated young adults are particularly likely to be struggling. They are both more likely to be in households that are in arrears and tend to have debts (e.g. hire purchase and mail order) that need to be repaid more quickly.
 
•    Debt problems tend to be 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.

•    People tend to end up with debt servicing costs that take up large fractions of their income because they take on new debt, rather than because their income falls.  Only around one in six of those newly facing very high repayments as a fraction of their income ended up in that position solely because of a fall in their income.

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.”

Notes to editors

1. ‘Problem debt and low-income households’ by Andrew Hood, Robert Joyce and David Sturrock was published as an IFS report at 00.01 on Tuesday 16 January 2018. For an any enquries, please contact Bonnie Brimstone in the IFS press office: @email / 020 7291 4818 / 07730 667 013. 

2. The Joseph Rowntree Foundation has supported this project as part of its programme of research and innovative development projects, which it hopes will be of value to policymakers, practitioners and service users. The facts presented and views expressed in this report are, however, those of the authors and not necessarily those of the Foundation. The Joseph Rowntree Foundation is an independent organisation working to inspire social change through research, policy and practice. For more information visit www.jrf.org.uk JRF is on Twitter. Keep up to date with news and comments @jrf_uk. For press releases, blogs and responses follow @jrfmedia.

3. The authors also gratefully acknowledge funding from the IFS Retirement Savings Consortium, which comprises Age UK, Association of British Insurers, Chartered Insurance Institute, Department for Work and Pensions, HM Revenue and Customs, HM Treasury, Investment Association, Legal and General Investment Management, Money Advice Service, and Tax Incentivised Savings Association. Support from the ESRC-funded Centre for the Microeconomic Analysis of Public Policy (CPP) at IFS, grant reference ES/M010147/1, is also gratefully acknowledged.