How are household debts being affected by the economic recovery?

31st Jul 2015

With the average household debt reaching £3,500 at the last count, those on the lowest incomes are being hardest hit, says Aleks Collingwood.

A new study by the ONS has given us a snapshot of what happened to household debt levels during the recession and into the recovery. Not including mortgages, total household debt reached £104 billion between 2010 and 2012, an increase from £96bn in 2008-10. In 2010-12, the average household owed £3,500 on credit cards, overdrafts or loans and more than half of all households believed their debt was a burden.

The median amount of financial debt that households had borrowed increased by from £2,800 in 2006-08 to £3,500 in 2010-12, but the number of households having financial debt decreased (from 51 per cent in 2008-10 to 50 per cent in 2010-12).

People living in the least wealthy households were much more likely to regard their financial debt as a burden than those in the wealthiest households. Sixty eight per cent of those whose net incomes are in the lowest 10 per cent regarded their debt as a burden in 2010-12 compared with 33 per cent of those in the highest 10 per cent. The higher you move up the income scale, the fewer people report having a debt burden. JRF research shows that in 2012/13 one in five adults in poverty were behind with at least one bill, compared with one in 20 of adults not in poverty.

One of the findings that struck me the most was the analysis of financial debt by age. Debt has increased within each age group from 2006 to 2012 but the biggest increase by far is for young people (aged 16 to 24). See the graph below. Financial debt from credit cards, overdrafts and loans increased from a median of £1,540 in 2008-10 to £3,000 in 2010-12.

Median financial debt by age, Great Britain, ONS Wealth and Assets Survey, 2010-12

It isn’t surprising that household debt has generally been rising. JRF research shows that working households needed to earn substantially more in 2015 than in 2008 to achieve what the public thinks is an acceptable minimum standard of living. Overall, the cost of a basket of essential items rose by 29 per cent over six years, while average wages increased by 12 per cent and the minimum wage by 18 per cent.

Tackling the underlying factors that push people into accumulating these financial debts is vital. The introduction of the new National Living Wage will help to increase wages, but we also need improving employment conditions, the prospects of promotion, and support for different groups to enter the labour market. The costs of essential items are far too high, and we know that many people on low incomes pay a poverty premium as they can struggle to access the best deals.

Regulators have an important role to play in bringing this down. More competition between suppliers could reduce the poverty premium. Regulators could help by monitoring products, including credit, which are used disproportionally by people in lower-income households and examining whether they are fairly priced. It is essential that debt advice is easily available for anyone who is struggling. It is also important to consider the psychological effect that debt has on people. Long-term debt can lead to stress and relationship breakdown, which can result in people being pushed further into poverty.