A quarter of low income households struggle with debt

A quarter of households on very low incomes are facing high debt repayments or are behind on bills, according to a new study.

Research published this week by the Institute for Fiscal Studies (IFS) reveals around one sixth (16%) of the lowest income households are in arrears on repayments or bills.

And an additional 12% are spending more than a quarter of their income on unsecured debt repayments.

According to the IFS, the combination of these two figures shows that around a quarter of the lowest income households are struggling with debt.

The study also shows that young adults are much more likely (16%) to be in households that are in arrears or spending a large fraction of their income on debt than older adults (3%).

The report says that around half of all households in Britain have some of unsecured consumer debt. Almost half have unsecured debts with banks and other financial institutions, while a quarter have credit and store card debts, and a fifth have debts through hire purchase agreements.

And around one in 10 households has more than £10,000 of unsecured debt.

‘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,’ said report author and IFS research economist, David Sturrock.

‘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”,’ he added. ‘Distinguishing between debts that are entirely appropriate and those that look unmanageable is crucial.’

And the head of analysis at the Joseph Rowntree Foundation (JRF), Helen Barnard, commented: ‘More than one in five people on low incomes have problem debt compared with just one in 20 of those at the top of the income scale.

‘This is putting huge pressure on household finances: on average, those with problem debt in the bottom fifth spend £457 a month on paying back their debts, out of an income of £1,012.

‘Low income households are facing a difficult 2018, with rising prices, frozen benefits and a wage squeeze all putting further pressure on household incomes.

‘The government, regulators and lenders need to not only look at increasing access to affordable credit, but also at the financial pressures that can lead families to take on debt in order to get by,’ added Ms Barnard.