Risk of problem debt becomes ‘new normal’ for millions

_{9 December, 2015}

Living on the very edge of problem debt, which can blight people’s lives, is now the norm for millions across the UK according to a major new report – Navigating the New Normal – released today by StepChange Debt Charity.

The charity’s research finds that the changing reality of work in Britain following the financial crisis, such as growth in zero-hours contracts, self-employment and other forms of less secure work has left more people susceptible to ‘income shocks’ - changes in circumstance that lead to sudden falls in income e.g. job loss or reduced hours. This can often leave them relying on credit to make ends meet, a situation which can lead to a damaging spiral for individuals and their families.

Debt in Britain 2015

There are currently 2.6m Britons struggling with severe problem debt – down from 2.9m in 2013. However, the number of families with children in severe problem debt has risen by 16% since 2013 and now stands at 750,000. Those on low and middle incomes - £15,000-£25,000 and £25,000-£35,000 - are the most likely to be in severe problem debt and an increasing proportion of this group find themselves in this position.

Insecure work exposes people to income shocks

Insecure work exposes people to income shocks and the risk of problem debt: 67% of people on a zero-hours contract suffered an income shock in the last year. For those who were self-employed or on a fixed term contract it was 53% and 59% respectively, whereas for those in permanent positions it was lower at just 33%.

Britain’s labour market is very flexible and this may bring competitive advantage, but the changing nature of working life has created a ‘new normal’, where income shocks will become a regular feature of many people’s lives. We need to ensure our social policies keep up with these changes. Overall, people in insecure forms of work are twice as likely to suffer income shocks as those in permanent jobs.

Income shocks

Income shocks are the key determinant of whether someone falls into problem debt: 73% of people in problem debt faced an income shock in the last year. These shocks are widespread, with 14m Britons (over a quarter of the adult population) having suffered at least one income shock in the last year. Of those people facing income shocks, 4.5m suffered two or more, of whom nearly a quarter (1m) fell into severe problem debt. Those suffering multiple income shocks were three times more likely to fall into severe problem debt than those experiencing just one.

Financial resilience and inadequate safety nets

The risk of facing income shocks is compounded by both a lack of financial resilience, e.g. rainy day savings, and safety nets that too often fail to provide adequate support. With real-term wages still only at 2005 levels, households have little spare income to help protect themselves from income shocks.

For many, credit is used as part of a coping strategy, which often has dangerous consequences. Nearly three quarters of people who fell into problem debt relied on credit cards and overdrafts or borrowed from friends and family; half of people applied for benefits and one in five used high-cost credit or used foodbanks, credit unions or other not-for-profit providers.

Mike O’Connor, Chief Executive of StepChange Debt Charity, said: “People have always faced ups and down in their incomes, but the changing nature of work means that income shocks are now a regular feature of more people’s lives. These changes may be here to stay and social policies need to reflect the new normal. Our social policy is not keeping up with our economic policy.

“We need mechanisms and safety nets that will ensure that a drop in income doesn’t precipitate a rapid fall into problem debt. People, especially those on low incomes, need more help to build precautionary savings. Our welfare system should respond to people’s needs and help them cope with short-term ups and downs so that a temporary change in circumstance does not become a serious and entrenched financial problem.”

Notes to editors:

1. All findings are taken from “Navigating the New Normal”. Research based on survey of 1,311 StepChange Debt Charity Clients (fieldwork conducted 15th July to 11th August, 2015); and a 4,771 person sample YouGov survey (fieldwork conducted 10-12th August, 2015).
2. StepChange Debt Charity defines ‘severe problem debt’ as people displaying three or more objective signs of financial difficulty as identified in research conducted for StepChange Debt Charity by the Personal Finance Research at Bristol University. The signs of financial difficulty are: making minimum repayments on credit commitments for three months or more; falling behind on essential bills; using credit to pay essential bills; using credit to keep up with credit commitments; using credit to make it through to payday; and getting hit with overdraft or late payment charges on a regular basis.
3. StepChange Debt Charity’s vision is a society free of problem debt. Our ethos is founded on helping people to repay their debts where they are able to do so. Where they cannot, we provide advice including, where appropriate, supporting them through insolvency processes. Our advice is always based on the best interests of our clients.
4. StepChange Debt Charity is majority funded by voluntary donations from lenders who support the work of the charity. All funding goes towards helping people in problem debt – this includes providing impartial advice, promoting the benefits of free debt advice, and managing all the debt repayment and debt relief options we provide.
5. StepChange Debt Charity campaigns for changes to public policy that will prevent problem debt and improve the situation of those affected. Details of the charity’s research can be found here.
6. StepChange Debt Charity is a trading name of the Foundation for Credit Counselling a UK registered charity in England and Wales (Company No: 2757055) (Registered Charity No: 1016630). Registered office: Wade House, Merrion Centre, Leeds LS2 8NG. It is authorised and regulated by the Financial Conduct Authority.
7. The StepChange Debt Charity free phone helpline 0800 138 1111 is open 8am to 8pm, Monday to Friday and 8am to 4pm Saturday.
8. Online help is available any time from StepChange Debt Charity Debt Remedy at www.stepchange.org
9. Follow us on Twitter: @StepChange and @Moneyaware