Low-income households have piled up expensive debt and are vulnerable to shocks, report finds

Low-income households have racked up borrowing on loans, credit cards and other consumer debt faster than any other group since the financial crisis, leaving them over-exposed to another economic shock, according to a new study.

Much of the rise in consumer credit since the financial crash has been on high-interest products including store cards and overdrafts charging rates averaging 20 per cent, the Resolution Foundation said.

The think tank said fears of another crisis fuelled by too much consumer debt are overblown but it urged policymakers to focus on combating the negative effects of indebtedness among potentially vulnerable groups.

It comes as Santander became the latest high street benk to hike interest rates on its overdrafts to 39.9 per cent.

The lender joins HSBC, Barclays, First Direct, M&S Bank and Nationwide who have all responded to new rules banning daily overdraft fees by increasing the APR they charge.

The Resolution Foundation said overall consumer debt levels are below the peak reached before the last recession. Borrowing excluding mortgages was 15 per cent of total income last year, compared to 19 per cent in 2008.

But the average hides varying experiences with debt for different income groups over the past 12 years.

For instance, comparing the 2006-2008 period to 2016-2019 there was a 13 percentage point rise in the share of lower-income households (defined as the bottom fifth of erners) using a credit card. Among those in the middle there was a 4-point rise and in the top fifth only a 2-point increase.

There was also a 4 percentage point rise in the share of households in the bottom income quintile using overdrafts as compared to a 2 point rise among those in the middle and a 1 point fall among those at the top. 

The rise has coincided with an unprecedented period of stagnant wages, alongside dwindling savings, suggesting that low-income households have topped up their income with expensive debt. 

Fewer than half of low-to-middle income families reported having any savings in 2016-17, representing a rise of 15 percentage points since the financial crisis and leaving them exposed to a period of hard times.

Kathleen Henehan, policy analyst at the Resolution Foundation, said: “Access to new credit can be hugely beneficial for low-income families, but with many also reporting that they have no savings to fall back on, these high debt repayment pressures are a sign of stretched living standards. 

“The risk is that this leaves them far too exposed to future financial shocks, reinforcing the need for policy makers to focus on the living standards of those on low and middle incomes.”

While lower-income households have taken out increasing amounts of expensive, unsecured credit, wealthier households have benefited disproportionately from record-low mortgage interest rates. 

Those in the top household income quintile are more than three times as likely to access mortgages as those in the bottom fifth.

Recent research from the Bank of England concluded that low interest rates were the primary driver of rising house prices over the past four decades, not shortage of supply, as has been suggested. 

“Nearly all of the rise in average house prices relative to incomes can be seen as a result of a sustained, dramatic, and consistently unexpected, decline in real interest rates,” the researchers wrote.

A jump in average house prices of 52 per cent from a low point in 2009 has seen generates trillions of pounds of property wealth, with older, wealthier households enjoying the lion’s share of gains.

Estate agents Savills found that the total value of the UK’s housing stock hit a record £7.4 trillion last year having jumped £2.7 trillion in the past decade alone. An “unprecedented” 46 per cent of homeowner wealth is now in the hands of the over 65s, Savills said.