Economic recovery failing to fix fragile household finances

The UK economy is growing, yet StepChange Debt Charity is approached by more than a thousand people every day who are struggling to deal with their finances.

Millions of households’ finances are so fragile that that they are weeks away from falling into a spiral of debt if they faced a drop in income or a cost they can’t afford, according to a major new report Life on the Edge, released today by StepChange Debt Charity.

• 15 million people are already falling behind on bills and using credit to pay for essential costs
• 13 million people do not have enough savings to keep up with essentials for a month if their income dropped by a quarter
• Those on average income, families with children and people in full time work are most at risk of falling into debt
• A national strategy is needed to help households avoid problem debt, including: measures to boost personal financial resilience; strong and responsive safety nets; and a formal role for creditors in helping those in financial difficulty

Based on new research the report shows how a lengthy period of low wage growth, rising living costs and austerity has left millions of households stretched to their financial limits with no opportunities to save or set aside money for a “rainy” day. With scant savings and a lack of faith in welfare, families may feel they have no alternative but to use credit, including payday loans as a ‘distress safety net’ when they fall on hard times.

Chief Executive, Mike O’Connor says:

“Millions of people are living on the edge financially and are not prepared for the future.  Even with economic growth, consumers are likely to face interest rate rises and increases in costs of essential goods and services.

Unless we can improve families financial resilience, it is likely that people will be pushed over the edge, often as a result of resorting to high cost credit.   We need to act now to address the grave economic and societal problems that come with problem debt.” 

Some 15 million people are already falling behind on bills and using credit to pay for essential costs. This is particularly true of those on low and average incomes, families with children, those aged between 25 and 39 and people renting privately.

The costs of a lack of financial resilience for individuals, families and communities are high in both economic and human terms.  Debt is a brake on people’s capacity to work or return to work, a brake on aspiration, and a brake on potential.  It leads to mental health problems and family and relationship breakdowns.

The report sets out a range of short and long term recommendations to be included in a national debt strategy.  These are:

• Appoint a senior government minister to take charge of a national debt strategy to bring about the necessary response from  public, private and voluntary sectors;
• Bring together all creditors, including utility companies, landlords and Council Tax collectors, to improve the help they offer to customers in financial difficulties.  This would extend many of the practices of forbearance and reduced payments currently practiced by many financial lenders;
• ‘Breathing space’, ensuring that people in financial difficulty are guaranteed protection from further actions that may worsen their situation, such measures should include a freeze on interest and charges;
• Improve the financial resilience of working households with a “living costs challenge” that will ensure that those on lower incomes should not have to pay more for everything, including essential bills and credit,  and suitable savings products are available
• Ensure that free debt advice is available to all those who need it.

Summary of findings from Life on the Edge

Households on the edge

• 22 million people or 43 percent of adults in Britain are worried about their household finances, including six million who are “very” worried

• 13 million do not have enough savings to last a month if their income dropped by a quarter and 32 million would not be able to cope within their existing income

• 15 million people or 30 percent of UK adults report one or more sign of financial difficulty, including 3.5 million (seven percent) who reported two signs and three million (six percent) who reported three signs.

• using credit to keep up with essential bills
• using credit to pay other credit commitments
• using credit to last until payday
• making minimum payments on credit cards longer than three months
• falling behind on essential bills
• regularly facing late payment charges

Using credit as a safety net

• a  third of all households would use unsecured credit to keep up with essential costs

• most would use their overdraft as a safety net followed by credit cards, but 1.5 million would consider payday loans, particularly by those on lower incomes.

Why are families struggling?

• a third of people (35 percent) experienced at least one significant change in their circumstances in the last year that could have a strong bearing on their finances:
  • Almost 4.5 million adults were in insecure employment (temping, zero hour or short contracts).
  • Almost 4 million adults saw their hours at work reduced
  • Almost 2.5 million self-employed people saw a downturn in their business
  • Almost 4 million saw increased caring responsibilities
  • Almost 2 million experienced a relationship breakup
  • Almost 2 million had a pregnancy or a new born child