Problem Debt and Low-Income Households

In recent years, the debt holdings of households in Great Britain have been a subject of attention and concern amongst policymakers and the general public. In particular, there has been heightened awareness of unsecured household debt or ‘consumer credit’ such as credit card debt, hire purchase agreements and unsecured loans.

One aspect of the concern around unsecured debt is that keeping up with repayments on these debts may place significant financial and psychological burdens on households. Requirements to make large repayments could have effects on households’ ability to purchase other essential items, with immediate impacts on the well-being of members of the household. Extended periods when income is being used to make debt payments may mean that households cannot make important investments, with knock-on consequences for future life prospects.

Yet households can hold debt for good reasons.

Credit cards and loans can be used to meet unexpected costs or to smooth over periods when income is temporarily low. Hire purchase and leasing agreements may enable a household to access a durable good, such as a car, sooner than would otherwise be the case. Such decisions may be perfectly reasonable, and indeed actually beneficial to a household whose income in future will allow it to meet debt repayments without getting into problems.

It is therefore crucial to distinguish between the occasions when debt is a problem and those when it is not. To do this, we need to go beyond aggregate figures about debt holdings and look at individual households’ situations and the circumstances in which debt is taken on and paid off. In this report, we set up and examine metrics that bring together different aspects of households’ situations to capture better when debt may be problematic. Understanding the nature and evolution of cases where debt can lead to problems will increase our understanding of why this can happen and so inform responses which seek to alleviate or prevent ’problem debt’.