Britain’s debt, how much is too much

Today, The Financial Inclusion Centre and partners published a new report, Britain’s debt, how much is too much?, commissioned by the ACCA.

The report examines household financial resilience, its links with household income, credit use and overindebtedness with a focus on three at risk groups – the self-employed, households on variable incomes, and students.

It also looks in more detail at the non-standard credit market assessing the impact of the much needed clampdown on payday lending and the higher risk end of the credit card market where serious problems are evident. Of active credit cards, the FCA estimates that 5.1 million accounts (nearly 9% of total) will take more than 10 years to pay off their balance (on current repayment patterns and assuming no further borrowing).  Nearly one in five credit cardholders are financially vulnerable in some way – either already struggling or at risk of problem debt. Higher risk borrowers have very limited choice and are paying much higher costs for their credit.

As well as identifying problems, the report makes a series of recommendations to support households who are overindebted and, crucially, to help households build financial resilience and long term financial security.

We set out a road map to long term financial security with measures designed to: help households deal with debts; improve access to fair and affordable credit; encourage more positive financial behaviours; and support the build up of savings. Supporting savings is critical as the UK household savings ratio has fallen dramatically over the past five years and is projected to remain low. Yet we know that when households have a savings cushion this can help them avoid getting into problem debt.

We argue for a combination of:

  • more robust, targeted regulation to deal with consumer detriment in the non-standard credit market;
  • greater use of ‘nudge’ techniques and fintech to encourage positive behaviours such as greater use of alerts to warn households of credit limits being breached, persuading people who have completed debt management plans to start saving, and extending auto-enrolment to include a savings element; and
  • financial innovation in the form of social lending bonds and ethical lending markets to enhance the capacity of the non-profit alternative lending sector to replace payday lenders and rent-to-own providers.

We are keen to promote social lending bonds as a way of encouraging much needed long term, patient capital into the alternative lending sector.

The full report can be found here: britains-debt final report