Low income households ‘exposed to financial shocks amid consumer debt growth’

January 15, 2020 12:01:00 AM

Low income households’ use of consumer debt has grown more rapidly since the financial crisis than that of wealthier families, a think tank has found.

The Resolution Foundation argued that poorer households have become too exposed to potential financial shocks.

It found that the proportion of low-income households using some form of consumer debt lifted by nine percentage points – from 53% to 62% – between 2006-08 and 2016-19 – a steeper increase than the one percentage point rise to 64% among high-income households.

Low income households were defined as the poorest fifth of the population, while those on high incomes were the richest fifth.

The Foundation, which focuses on improving the living standards for those on low to middle incomes, used UK Bank of England figures to make calculations for its report.

It said the rising use of consumer debt has been concentrated on products with high interest rates that have not necessarily become cheaper over the past decade – unlike mortgages, which low-income households are less likely to have taken on.

For example, low income households’ use of credit cards, which can typically charge 20% interest, grew by 13 percentage points between 2006-08 and 2016-19.

The report, titled “An Outstanding Balance?” also argued that fears of another debt-fuelled financial crisis are overblown.

Overall consumer debt levels remain significantly below pre-crisis levels, it said.

But it said this does not mean that policy makers should relax about household debt – and they should instead focus on the rising use of consumer debt among potentially vulnerable groups, and the types of credit they are using, the think tank argued.

It said more than half (53%) of low income households with consumer debt reported difficulties in meeting accommodation costs in 2016-19, up from one in three households in 2006-08.

Kathleen Henehan, 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 policy makers to focus on the living standards of those on low and middle incomes.”