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Debt and arrears amongst low-income families

Press release
The rising level of household indebtedness in Britain is a topic that pervades the media and is causing concern to the Bank of England and other financial institutions. But so far few hard facts have been known as to whether rising debt levels are associated with growing arrears of debt, and whether families are facing increasing difficulties in paying off these debts.

Research published in the forthcoming March issue of Fiscal Studies shows that the debt problem is a little different from that portrayed in some parts of the media: consumer debt is expanding rapidly on the back of a growth in real living standards and rising house prices but it is not homeowners who face difficulties in paying back debt; rather it is people with low incomes, typically without a job or their own property, who report problems with debt arrears. Moreover, the focus on credit card debt in the media ignores that fact that families use a great variety of sources of credit, including catalogues, store cards and mail order, and that arrears on some of these credit sources are much more prevalent among families with children than arrears on credit cards.

This research uses a large representative sample of single parents and of low-income couples with children (with incomes up to 35% above the Family Credit ceiling) to examine access to credit and arrears on debt. The sample covers those families most likely to get into difficulties. The sample is 'tracked' in subsequent years through the Family and Children Survey, which also expands the sample to be representative of all families with children.

The paper focuses on five areas of household finances where problems of arrears and default might arise. These are credit-financed purchases, loans from financial organisations (ranging from banks to local moneylenders), loans from family, and arrears arising from non-payment for housing and for utilities. The primary focus of this analysis is on the first wave of the data (collected in 1999), although the authors also carry out some simple analysis of persistence in the use of particular forms of credit and, in particular, in the persistence of default and arrears (using data from tracking the sample in 2000 and 2001).

The research, by Sarah Bridges and Richard Disney (University of Nottingham), reveals strikingly different patterns of debt between one-parent families and low-income couples with children, and between tenants and homeowners.

Key findings include:

  • There were striking differences in credit use (other than mortgages) between homeowners and tenants. 57% of home-owning couples and 54% of home-owning single parents were using credit cards or store cards, as opposed to 19% of tenant couples and 13% of tenant single parents.
  • Homeowners are roughly twice as likely as tenants to use bank loans and overdrafts. They are also more likely to have bank accounts in the first place. This could be because these types of credit are more readily available to home owners.
  • Conversely, catalogues and mail-order schemes were used more by tenants than by home-owners. Roughly 1 in 20 tenants face problems in repaying debt incurred through catalogue and mail-order schemes.
  • Informal sources of loans (friends and family) were used by roughly one in six families, especially tenants and lone parents. Default rates were high for all types of families for informal loans and for loans from moneylenders.
  • 12% of home-owning couples and 13% of home-owning single parents were having difficulties keeping up payments on loans from financial institutions or moneylenders, as opposed to 22% of tenant couples and 25% of tenant single parents. This seems to contradict the proposition that homeowners are more likely to default because they can borrow larger amounts, using the house as collateral. The more likely explanation is that problems of debt arise from low incomes, rather than from 'irresponsible lending' to homeowners by high-street institutions.
  • Over 40% of lone parents and 30% of low-income couples with children are behind with bills for various household utilities and services.
  • Given that renters are typically poorer than owner-occupiers and less likely to be in stable employment, it is not surprising to find that the incidence of rent arrears (34%) is much greater than that of mortgage arrears (9%).
  • Older respondents are associated with lower amounts of arrears. However, every extra child raises the average amount of arrears by õ7 for couples and ÷5 for single parents.
  • In terms of family income, having access to housing and disability benefits tended to reduce arrears, although 'other benefits' were associated with an increase.
  • There is evidence, particularly among single parents, that working increases average arrears - presumably because work is associated with greater access to credit arrangements and/or because work involves expenses. However, once people are in work, higher earnings significantly reduce arrears.
  • People with higher levels of qualifications, which are usually associated with higher incomes, had lower levels of arrears.

The results suggest that low-income families indeed utilise a variety of credit arrangements, with greater use of catalogues and mail-order schemes, relative to credit cards, and loans from sources other than high-street banks, relative to the population as a whole. This may illustrate constraints on access to normal 'high-street credit', but such families may also choose other sources of credit for a number of reasons that are unrelated to access. For example, temporary non-payment of regular bills such as utility bills, or loans from relatives, may be a less costly alternative to bank loans or credit cards as a means of financing current expenditures.

Persistence of arrears was found to be greatest in dealings with local authorities - through levy of council tax and possibly local authority renting - along with mortgage lenders and water utilities (who face legal limitations on their ability to cut off non-payers), but the annual rates of persistence are rather low. The figures (in the attachment) illustrate this. In addition, the pattern of arrears suggests that low income families utilise categories of credit arrangements where they can engage in some negotiation over payment of arrears and where interest is typically not charged on overdue amounts. There is also some evidence of rotation of arrears on utility bills - that is, switching between providers of different utilities in non-payment


Notes to editors

  1. The article, by Richard Disney (Experian Centre for Economic Modelling, School of Economics, University of Nottingham and Institute for Fiscal Studies) and Sarah Bridges (Experian Centre for Economic Modelling, School of Economics, University of Nottingham) is published in the March issue of Fiscal Studies, (2004) vol. 25, no. 1, pp. 1-25. Press copies are available from the IFS press office (contact Emma Hyman on 020 7291 4800 or
  2. A briefing to launch the work will be held on Thursday 1st April at 12.30 at the Institute for Fiscal Studies. The authors will also present new data from 2001. Please contact Bonnie Brimstone on 020 7291 4800 or if you would like to attend.
  3. The figures (in the attachment) show the persistence of debt for couples with children and for lone parents.

Find out more

Journal article | Fiscal Studies, Vol. 25, No. 1, February 2004
Household accumulation of debt and arrears on debt, especially among low-income families, is an extremely topical issue in the UK media and in policy circles.