Only a third of people in low income household with consumer debt have enough spare cash for an emergency, a new study has found.
The Resolution Foundation says that consumer debt among poorer households has risen the fastest among any income group, with the proportion rising by nine percentage points.
This group has become more exposed to higher-interest rate products such as payday loans, while the lower overall cost of debt, in terms of a looser monetary policy has mostly benefited wealthier households.
Kathleen Henehan, a research and policy analyst at the Resolution Foundation said that the lower cost of borrowing since the financial crisis has mainly advantaged higher earners
Some 53 per cent of the lowest-earning fifth of households report having difficulty with paying accommodation costs in the 2016-19 period, up from 33 per cent in 2006-08.
During that ten-year period, there was also a four percentage point rise amongst this group taking out overdrafts, compared to a one point fall among those in the wealthiest fifth.
Meanwhile, the share of lower-income households with excess payments greater than £500 has more than doubled to 9 per cent.
The share of working-age households with credit cards has jumped from 29 per cent to 38 per cent and the proportion with student loans has doubled from 8 per cent to 16 per cent. Store card and mail order purchase borrowing has also grown.
Kathleen Henehan, a research and policy analyst at the Resolution Foundation said that the lower cost of borrowing since the financial crisis has mainly advantaged higher earners.
‘Falling mortgage costs have also reduced the costs of debt for many, mainly higher income families. However, the use of often high-cost consumer credit has risen over the past decade, particularly among low-income households.
‘Access to new credit can be hugely beneficial for low-income families, but with many also reporting that they have no savings to fall back on, these high debt repayment pressures are a sign of stretched living standards.
The total value of household consumer debt as a ratio to disposable income has dropped from 110 per cent during the financial crisis to 98 per cent today
They note that the borrowing rate on ‘unsecured’ borrowing such as most consumer debt tends to be higher than secured debt like mortgages. Consequently, lower-income households are affected to a much greater extent.
She adds: ‘The risk is that this leaves them far too exposed to future financial shocks, reinforcing the need for policy makers to focus on the living standards of those on low and middle incomes..
Along with her co-author Jubair Ahmed, she calls on politicians to focus more on some of the core problems causing growing debt levels, including insecure work and pay volatility.
They also want more attention paid to the increasing role that council tax and utility bills have in pushing families into arrears.
Policymakers should worry less about overall debt, they say as it is more than 10 percentage points below pre-crisis levels.
The total value of household consumer debt as a ratio to disposable income has dropped from 110 per cent during the financial crisis to 98 per cent today.
Henehan told MailOnline that politicians should ‘focus instead on who has this debt, and the credit products they’re using.
Gambling regulators also announced this week that people will no longer be able to make wagers using credit cards from April in an effort to cut problem gambling
‘This means monitoring the distribution of debt and making targeted interventions where necessary – such as the recent clamp down on the practises employed by payday lenders.’
She also added that delays and difficulties receiving benefits has also exacerbated the rate at which people move into consumer debt.
‘Many Universal Credit [UC] claimants face problem waiting for their first payment – either due to the five-week wait, or further delays in receiving their full award – which can pass them into arrears, and increase their exposure to debt.
‘So, while UC is unlikely to be having any impact on overall levels of consumer debt, it is having an impact on some of the households who claim it,’ she wrote.
The report praises action by the Financial Conduct Authority (FCA) in 2015 to put limits on payday loan default fees and interest rates. They further welcomed the body’s recent call on banks to even up arranged and unarranged overdraft fees.
Gambling regulators also announced this week that punters will no longer be able to make wagers using credit cards from April in an effort to cut problem gambling. Over 160,000 people who use a credit card for betting have a gambling problem, according to the Gambling Commission.
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