Joseph Henson is the CSJ’s lead researcher on Serious Personal Debt and author of Maxed Out – the human cost of Britain’s debt crisis.
As the doom and gloom of the recession slowly starts to clear, many families are looking forward to brighter times, greater job security and the possibility of improving wages. However, the picture in many others is not so sunny. Across the country some families are lying awake at night worrying about how to pay their rent, juggle their credit card bills and feed their families.
Amanda is just one example. She described to the Centre for Social Justice (CSJ) how she became terrified of the relentless phone calls from creditors trying to reclaim the debts taken out by her ex-husband. Already out of work because of disability, she became withdrawn and depressed, eventually trying to take her own life.
Sadly, Amanda is just one of millions of people trying to survive the UK’s unrelenting personal debt crisis.
As we highlight in our report Maxed Out, published yesterday, our household debt problems are not merely financial. One quarter of debt advice clients report that their relationship ended as a result of their debts, while one in three has contemplated or attempted suicide. Worrying about debt can impact on people’s performance at work, drive them to drugs and alcohol, and lead to mental health issues. This is often what separates ‘problem debt’ from the responsible debt that underpins Britain’s modern economy.
UK households now owe £1.43 trillion, a level of personal debt that has been rapidly building for the past 20 years. Each year over 130,000 people file for bankruptcy or other insolvency, almost two million seek formal debt advice and an estimated one in five households would benefit from such help as they are struggling with financial commitments.
There are two sides to personal debt – the household characteristics that put people at risk (lack of savings, irregular or low incomes, and poor financial skills) and the problems that drive their debt (unemployment, the rising cost of living, family breakdown or large unexpected bills). As Britain has borrowed more on credit cards, personal loans and large mortgages, households have also begun to save less. A third of households have no savings – including 3 million low-income households.
Personal savings are not just about planning for retirement or to purchase a house, but about building financial resilience. Around 3.9 million British families reported they would be unable to pay their rent for one month from savings. Since the financial crash, over 26,000 households in the UK have become homeless because of their rent or mortgage arrears.
A lack of savings disproportionately affects those on the lowest incomes. The recent 25 per cent rise in the cost of living over the past five years has squeezed household budgets at a time when mainstream banks are tightening access to credit. Unexpected bills or costs, such as purchasing a new school uniform or repairing a fridge, can place a real strain on families with few options.
Often people must borrow from high-cost lenders, or take on an unauthorised overdraft, potentially sending them into a debt spiral. Worse still, an estimated 310,000 people are extorted by loan sharks each year.
Britain’s current problem debt crisis, identified by the CSJ in our 2007 report Breakthrough Britain, was not caused by the financial crisis, and those suffering most are not in debt purely because of poor budgeting or a lack of financial skills. But the decline of Britain’s savings culture did make people particularly vulnerable to unemployment, stagnant wages and rising living costs that have followed the recent recession. Sadly, little seems to have changed. A recent survey indicated that one in six people still buy things when they cannot afford them, five million fewer people have money saved away for a rainy day than in 2006, and one in four say they prefer to live for today than tomorrow.
An obvious path to encourage greater savings is to build on the Government’s investment in Britain’s credit unions. Currently a small sector, with just a million members, credit unions can help encourage savings through automatic enrolment with employers. This has proven successful in other countries such as America or Ireland, where credit union enrolment is as high as 70 per cent, and where they are an accepted alternative to mainstream banks. Other possible tie-ins could include credit union membership through housing associations or through schools as has been trialled in Glasgow where every 16-year-old is now given a credit union account with £10.
Mainstream banks could also do more to help people manage their money and save through the products they offer. The Fairbanking Foundation has begun a programme to issue kite-marks to banks that offer incentives and services to help people save and reward them for doing so. There is currently a lack of products designed for those on the lowest incomes, leading millions to avoid banking all together.
Accounts that are more transparent and with built-in budgeting and savings features, such as a ‘jam jar’ account, could help not only to promote financial inclusion, but also encourage people to save. This is especially true for Universal Credit claimants who will now be paid their benefits, including housing benefit, as one monthly payment, enabling better financial planning and budgeting.
Christmas is fast approaching and what should be a season of joy will for too many be filled with worry, stress and sleepless nights. There could not be a better time to make tackling Britain’s debt crisis a political priority.