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London the debt capital of Britain at a cost of £1,4bn a year

16 August, 2016

Londoners are more likely to be struggling with debt than the rest of the UK and its knock-on effects cost the city £1.4bn a year, according to London in the Red, a new report from StepChange Debt Charity.

The report also shows that the charity’s clients living in the capital owe more on credit cards, loans and other credit debts, have higher arrears on essential bills and face a greater struggle to make ends meet. The charity is estimating that half a million people in the city are now over-indebted.

The report is based on in-depth analysis of over 15,000 of the charity’s clients and it shows that debt is widespread problem across the capital. It outlines key differences between affluent and deprived areas, where there is a stark contrast between people’s reasons for falling into debt and the types of debts they hold.

The charity is calling on politicians across London to work together to help people in London avoid problem debt. It says that action from the Mayor of London and other elected officials to promote affordable credit options, savings and the uptake of debt advice could prevent, or reduce, the harm caused by problem debt.

More Londoners in debt at a cost of £1.4bn

Londoners are significantly overrepresented among StepChange Debt Charity clients when compared to the national population. Last year, nearly 550,000 people sought help and advice from the charity and almost one in five were from London, despite only around one in seven people in the UK living in the city.

The charity also estimates that debt costs the London economy £1.4bn, including extra costs from housing, unemployment, mental health and relationship breakdown.

Higher debts, struggling with bills and tighter budgets

The average debt among StepChange Debt Charity clients is £11,980 nationally, but in London it is 3.5% higher at £12,402. The charity’s London clients also have higher arrears on their essential bills, including rent/mortgage and Council Tax:

  • 36% of London clients who rent were in arrears by an average of £1,347 compared to 29.8% and £904 across the UK
  • 37.7% of those with a mortgage were in arrears by £4,177 on average, compared to 31.8% and £3,108 across the UK
  • 37.9% were in arrears on Council Tax at an average of £1,123 compared to 32.5% and £931 across the UK

The report also shows that London clients on average are £66 short of being able to afford their essential bills and credit commitments each month. Nationally, StepChange Debt Charity clients are £15 short on average. A major reason behind this difference is that although the average income of the charity’s London clients is almost the same as across the rest of the UK (£1,216 vs. £1,218), people in London face much higher living costs.

People are struggling across all areas of London

Debt is problem across the capital, but the report shows that people in London’s more affluent areas are more likely to have fallen into debt because of a divorce or separation, Whereas for those in more deprived areas, a sudden drop in income is the most common cause of their financial problems.

There are also significant differences in the types of debts people hold between deprived and affluent areas. Those in more affluent areas have higher debts and use credit cards and overdrafts more. Those in deprived areas have lower incomes and are more likely to have arrears on essential household bills, which is indicative of the struggle many people face just to make ends meet.

There were also distinct patterns in the characteristics of StepChange Debt Charity clients depending on levels of deprivation in the borough where they live. Our clients in poorer London boroughs were more likely to be:

  • single
  • unemployed or studying
  • renting council housing
  • in arrears on essential bills, particularly their rent

Our clients from London’s more affluent boroughs were more likely to be:

  • part of a couple
  • employed full-time, working for themselves or caring for someone
  • paying a mortgage, own their  home outright or renting from a private landlord

Low wages and high living costs lead to thousands struggling

Real term cuts to benefits and a fall in the real term value of wages since the recession have coincided with a rise in utility costs and soaring private sector rental and house prices.

When combined with the rise in insecure jobs, such as part time, temporary or zero hours contracts and a rise in self-employment, this increases the financial vulnerability of households. If people then suffer a shock to their income, such as redundancy, reduced hours, a cut to benefits or a relationship breakdown, the consequences can be severe, particularly if they have no savings to weather the storm.

Trust for London has previously reported that 27% of Londoners live in poverty after housing costs are taken into account, compared with 20% of people in the rest of England.

Lack of savings

The tight budgets Londoners have to deal with have made it almost impossible to build up essential rainy day savings to cope with sudden expenses or drops in their income, putting them more at risk financially.

StepChange Debt Charity estimates that if every family in London had £1,000 in savings, it would stop 66,000 of them falling into problem debt.

Firm action needed from London politicians

StepChange Debt Charity is calling on the Mayor of London to use his convening powers to bring together local authorities and debt advice providers to ensure that debt advice is sufficiently resourced in London. It also wants the Mayor to take action to promote savings options, such as credit unions, to enable people to access affordable credit and begin saving.

The charity is also calling for co-ordinated political action from the Mayor of London, the minister for London and central government to work with local authorities and ensure that boroughs and Councils have fair debt recovery processes. A central recommendation from the report is for local authorities to share best practice and ensure that people in financial difficulty are able to make affordable repayments that don’t make their existing problems worse.

Mike O’Connor, Chief Executive of StepChange Debt Charity, said:

“Debt can affect anyone at any time, regardless of their income, and it can bring with it severe consequences for individuals and their families. The problem is particularly serious in London, where rising living costs and sluggish wage and cuts to benefits have combined to leave people financially vulnerable and with little hope of building up savings or owning their own home. The streets of London are more likely to be paved with debt than with gold.

“The new Mayor of London has already spoken of the housing crisis, but the problem goes much deeper than that. He must now use his convening powers to orchestrate effective action to address the debt problem gripping our capital city.

“With firm action to raise awareness of savings  options, affordable credit and debt advice, hundreds of thousands of people could get the help they need to recover financially and avoid the devastation of severe problem debt.”

  London Average UK Average Difference
Total debt £12,402 £11,980 £422
Rent arrears £1,347 £904 £443
Mortgage arrears £4,177 £3,108 £1,069
Council Tax arrears £1,123 £931 £192
Average income £1,216 £1.218 -£2
Average amount left after outgoings -£66 -£15 -£51

 

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Foundation for Credit Counselling Wade House, Merrion Centre, Leeds, LS2 8NG trading as StepChange Debt Charity and StepChange Debt Charity Scotland. A registered charity no.1016630 and SC046263. It is a limited company registered in England and Wales (company no:2757055). Authorised and regulated by the Financial Conduct Authority.

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© StepChange Debt Charity 2016