Everyday changes in circumstances are putting millions of Britons at
risk of serious debt problems as people use credit as a safety net to
plug gaps in their income, according to a new report released today by
StepChange Debt Charity. The report, “Held Back By Debt”, reveals that
14 million Britons saw a change in economic circumstances last year and
that nearly half of them (6.5 million) relied on credit wholly or in
part to keep up with their essential outgoings.
The report details how those who use credit as a safety net are more likely to display signs of financial difficulty and more likely to suffer with problem debt; 1.7 million of those using credit following a change in circumstances ended up in severe problem debt within a year.
Labour market changes make income shocks more likely
The charity’s research shows that people who were self-employed, on zero-hours contracts or on fixed-term contracts were twice as likely to experience a change in economic circumstances in the last year as those in more traditional, permanent jobs. The charity believes these growing features of the labour market are leaving people more vulnerable to ‘income shocks’, and that these changes need to be accompanied by more comprehensive and responsive safety nets to ensure that people can cope with life’s ups and downs.
Financial resilience and inadequate safety nets
The report reveals that those who turn to credit or a combination of credit and welfare benefits in an emergency tend to be on low and middle incomes, are less likely to have savings and lack confidence that the benefits system will help them adjust.
The impact on work: reduced productivity, absenteeism and loss of confidence
A survey of the charity’s clients revealed that the impact of severe problem debt undermines productivity and blunts incentives in the welfare system to take work, leaving people less well insulated against shocks:
• 43% said that it led to them being unable to concentrate at work
• 15% said that debt worries led to changes in attendance, such as arriving late or taking more time off work
• 61% feel less confident about getting a promotion
• 76% said they would worry about taking on an insecure job in case it makes their income unreliable
Improving safety nets
The charity is calling for a plan to ensure that temporary changes in circumstance do not become severe, long-term debt problems. The charity has previously outlined two proposals that would protect people from unmanageable debt:
• £1,000 of precautionary savings – the charity’s research shows that if households had access to £1,000 in precautionary savings, 500,000 families could be prevented from falling into problem debt
• Breathing space – the charity has put forward proposals that would guarantee those seeking help to deal with their debt problems a guaranteed freeze on interest and charges, plus a halt on enforcement action
Mike O’Connor, Chief Executive of StepChange Debt Charity, said:
“We all face life’s ups and downs, but for too many the result is severe problem debt, which can affect their work, relationships and even their mental health.
“With so many people at risk, we must take action to improve safety nets and ensure they are there for people the moment problems strike. This does not mean more welfare benefits, but instead we need to support people in saving to protect themselves against income shocks and give them breathing space to recover when they fall into difficulty. This would foster self-reliance and boost the financial resilience of hard-pressed families, enabling them to get back on their feet and avoid the devastation that severe problem debt can cause.
“We know that problem debt costs society more than £8bn each year. It is not a problem that can be ignored and the case for taking action in terms of the value to individuals, their families and the wider society is clear.”
(Source - StepChange Debt Charity Press Release)