Self-employed most dependent on credit – and vulnerable to a problem debt cycle

27 November, 2012

New research has found that the self-employed are the most dependent on credit and vulnerable to a problem debt cycle. The research was conducted for StepChange Debt Charity by the Personal Finance Research Centre at the University of Bristol and looked at how the charity’s clients accumulated and managed debt.

It found that, of the three main types of credit used by those seeking the charity’s help - credit card, overdraft and personal loan - levels were far higher for the self-employed.

Higher problem debt levels

• Credit card: In 2012 the average credit card balance across all StepChange Debt Charity clients was £10,517 across 2.8 credit cards. By comparison, self-employed clients owed on average £17,237 across 3.6 credit cards.
• Overdraft: In 2012 the average overdraft balance across all StepChange Debt Charity clients was £2,082. Whereas self-employed clients owed an average of £3,615.
• Personal loan: In 2012 the average personal loan balance across all StepChange Debt Charity clients was £10,479, compared to £13,266 for self-employed clients.

Vulnerable incomes

A major reason for this dependence on credit is likely to be the vulnerability of the incomes of the self-employed. While all working households face increasing likelihoods of employment-related drops in income, this is more acute for the self-employed. Analysis of StepChange Debt Charity client data shows that almost half (49 per cent) of working households seeking debt advice in 2012 had lower household incomes than their counterparts in 2011.

The differences were particularly marked for households that depended on self-employment, with a six per cent decrease in household income levels between 2011 and 2012, going down from a monthly income of £874 to £825. This compares to a one per cent decrease for households dependent on full-time employment, with a monthly income going down from £2,626 in 2011 to £2,600 in 2012.

Using credit to invest in business

Qualitative interviews undertaken as part of the research highlighted why problem debt is disproportionately high among the self-employed. There were several examples in the interviews of working people using credit to set up a small business or to buy a franchise. This was sometimes triggered by a desire to boost household income or in response to redundancy. The investment did not always produce the expected returns, which in turn meant that credit was used for running costs, such as buying stock.

Commenting on the findings, Delroy Corinaldi, external affairs director of StepChange Debt Charity, said: “While anyone, whatever their job or income, can find themselves struggling with debt, those working for themselves seem to be particularly vulnerable to debt problems.

“I would be particularly concerned about the strain of trying to seek enough work to maintain an income while struggling with debt. Anyone in this situation should not suffer alone but seek professional advice and support help from a debt charity as soon as they realise that they have a problem.”

Download the full Working Households’ Experiences of Debt Problems report.