Consumer debt is being used by low-income households at the fastest rate since the financial crisis over a decade ago, research published by the Resolution Foundation reveals.
The research, which was published today, found that while overall consumer debt levels had remained below pre-financial crisis levels (15% of total income in 2019 compared to 19% in 2008), the proportion of low-income households using some form of consumer debt rose by 9%, from 53% to 62%, between 2016 and 2019 (the same rise that was seen between 2006 and 2008). This compares to just a 1% increase, to 64%, in consumer debt among high-income households.
While the overall debt among high-income households is higher, this debt often includes mortgage debt, which those on low incomes are much less likely to have taken on. Those with mortgage debt will have benefited from high competition among mortgage lenders, which, despite some average mortgage rates having increased since 2017, have remained low. Research from Moneyfacts.co.uk found that the average two year fixed mortgage rate on a 75% loan-to-value (LTV) has risen from 2.12% in December 2017 to just 2.30% in December 2019, while the average five year fixed mortgage rate on a 75% LTV has actually fallen from 2.65% in December 2017 to 2.58% in December 2019.
While mortgage rates have remained low, rates on other forms of debt have increased in recent years. For example, research from Moneyfacts.co.uk found that within two years, the credit card purchase APR has increased by 2.1%, from 22.9% December 2017 to 22% December 2019.
Resolution Foundation has also found that there has been a 15% rise in the share of low-to-middle households who have no savings, leaving many low-income households far too exposed to future financial shocks.
Commenting on the report, Kathleen Henehan, a policy analyst at the Resolution Foundation, said: “Britain is a long way from the levels of debt that drove the financial crisis, despite repeated claims to the contrary. Falling mortgage costs have also reduced the costs of debt for many, mainly higher-income families. However, the use of often high-cost consumer credit has risen over the past decade, particularly among low-income households.
“Access to new credit can be hugely beneficial for low-income families, but with many also reporting that they have no savings to fall back on, these high debt repayment pressures are a sign of stretched living standards.
“The risk is that this leaves them far too exposed to future financial shocks, reinforcing the need for policymakers to focus on the living standards of those on low and middle incomes.”
Christmas also puts a strain on consumers struggling with debt, with debt advice charity Money and Pension Service (MaPS) revealing that it anticipates it will take a call about debt every four minutes throughout January. Last year, the charity took 3,500 debt calls in January alone and believes this month will be equally as busy.
Earlier this month, we reported that the debt charity StepChange found 33% of British consumers planned to use credit to pay for part, or all, of their Christmas spending. While MaPS has predicted that Monday 20 January will be its busiest day as credit card bills for December arrive before many people have received their first paycheque of 2020.
Commenting on debts consumers are facing, Rachel Springall, finance expert at Moneyfacts.co.uk, said: “It’s easy to understand how debt can get out of hand for some, but it is important that consumers make time to review their finances and try to work out what they can do to improve their situation. Whether it be something simple such as moving an interest-bearing debt to an interest-free offer, or remortgaging to a lower interest rate to reduce their monthly repayments – there are plenty of competitive deals out there to choose from.
“Those consumers who have not had a pay rise, but may have seen their monthly expenses increase could be finding it difficult to put any money aside in case of emergencies as a result. However, it is important to build a nest egg as a fund to fall back on in case circumstances change with little warning.
“Thankfully, there are some supportive debt charity advice lines for consumers to call if they are in need, so they should never feel like they are doomed to suffer in silence, nor should they sweep their debt worries under the carpet. The StepChange Debt Charity has a dedicated free-phone helpline on 0800 138 1111 or consumers can visit their website for more information.”
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