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Held back by debt: how Britain's lack of financial resilience is tipping people into a debt trap

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Financial resilience in Britain. Research from StepChange Debt Charity.

People will always face ups and downs that they have to adjust to, but recent trends in the jobs market, with fewer working people in traditional permanent, full-time, steady-wage jobs, mean more people experience more frequent shocks and changes as part of everyday life.

Almost 14 million Britons faced an income shock or a change to their circumstances in the last year. But those working zero hours contracts, fixed term jobs and the self-employed were twice as likely to see a drop or interruption in their income.

This means that more than ever, people need safety nets to weather shocks and changes. Safety nets are effective options for managing falls and interruptions in income – and include welfare benefits, savings and insurance.

Graphic of piggy bank, which says 14 million people faced a shock to their income or a change in their circumstances in the last 12 months

Welfare benefits are being reformed to incentivise work, by mirroring work – a welcome principle. But these reforms need to be balanced to ensure that welfare benefits also acts effectively as a responsive safety net to the ups and downs of modern working life, in a world where fewer and fewer people have savings to fall back on.

Savings and welfare benefit gaps mean that in the last year 6.5 million people used credit to keep up with their outgoings after a change in their circumstances. Those who relied on credit in an emergency were more likely to be on low and middle incomes, less likely to have savings, and lacked confidence that the welfare benefits system would help them adjust.

Debt and credit

A quarter of those who relied on credit – 1.7 million people – ended up in severe problem debt within a year. They were twenty times as likely to be in severe problem debt as those who didn’t rely on credit.

So many people fall into severe problem debt when they use credit in an emergency, because credit commitments build up as people struggle to pay next month’s bills, plus last month’s, plus interest.

Caught in a debt trap

Once in debt, people face additional barriers to regaining work, are less productive when they are in work, and lose confidence in their ability to progress in their career. Severe problem debt turns everyday obstacles into long term problems.

Graphic of person pushing a block up a hill. Graphic says debt holds people back from regaining work. 68% say they have tried hard but struggled to get a better paid job. 76% worry about taking an insecure job in case it makes their income unreliable. 48% of people out of work were worried about higher debt repayments if

To avoid unnecessary barriers to work and drags on productivity, Government must ensure that people working hard and doing their best in the modern labour market have safety nets that help them cope with ups and downs and avoid the debt trap.

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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