The long shadow of the financial crisis

Citizens Advice research shows 800,000 people have struggled with debt since the financial crisis

Citizens Advice helped a couple in the Midlands who had a monthly income of £2,300 but had managed to borrow over £250,000. The couple owned a house with a mortgage of £90,000 and had other debts totalling nearly £90,000 — but at that point they were managing. Despite those debts, they remortgaged their house — increasing the amount owed on their home by £60,000 to £150,000, and were given an £11,000 loan on the side. The increase in their debts of more than £70,000 pushed them over the edge.

That lending and borrowing is clearly excessive — but it’s just one of tens of thousands of stories about reckless lending that Citizens Advice advisers could tell about the build up to the 2008 financial crisis.

Ten years on from the financial crisis, policy makers are again worried about the fast growth of household debt. Consumer borrowing — that’s non-mortgage debt — grew by more than 10% last year, the fastest rate since 2005. £14 billion of new consumer debt over the last 12 months means that it’s now worth 40% of people’s incomes. The pre-crash peak was 42%.

That fast growth of debt is not necessarily a problem. It becomes a problem for banks and individuals when people can’t afford to repay it. Citizens Advice helped people with more than 1.5 million debt problems last year and we see the impact of these unaffordable debts.

One client Dan came to Citizens Advice for help with debts he had accrued in the years since separating from his wife. He had built up £2,000 in rent arrears. He also owed £600 in council tax and £3,100 in credit card and mobile phone debt. He was facing eviction and was worried about the impact this would have on his son. He was issued with food vouchers as he no longer had enough money coming in to pay for essentials.

Many more people struggle financially than visit Citizens Advice for help with their debts. In 2016, 2.9 million households were either in arrears, found repayments difficult or found their debts to be a heavy burden. Renters and single parents are particularly likely to be struggling with debt. 31% of single parents struggle with debt compared to around 9% of all adults.

Chart 1: How many people are struggling with debt?

Source: Citizens Advice analysis of the Bank of England/NMG survey

But insight from Citizens Advice and nationally representative research shows their experiences aren’t uniform. While the majority of people who struggle with debt are able to get on top of their finances after 1 to 2 years, a large minority struggle over a long period of time.

Using the Wealth and Assets Survey — the best source of information about household finances — we looked at people’s experience of debt over an 8 year period.

Of the 4.3 million people who struggled with debt in 2006–8, 800,000 were still struggling in 2012–14. We estimate that around 1.5 million of them were back in problem debt in 2014–16 — spending nearly a decade in and out of problem debt.

Chart 2: How many people are stuck in debt?

Source: Citizens Advice analysis of the Wealth and Assets Survey

So why do people get stuck in debt? These 3 reasons stand out:

1. Credit card debt is difficult to repay. People with credit card debt are more likely to struggle to repay it. Between 2010–12 and 2012–14, 72% of people with loans were able to reduce their loan debt, while only 60% of those with credit card debt were able to reduce their credit card debt. This is partly because credit cards don’t come with a repayment plan.
2. Lenders push people further into debt. Credit card lenders often push people who are struggling further into debt. Nearly a fifth (18%) of people we surveyed who had a credit card and were struggling with their debts said they had their credit limit increased without them asking for it. That compares to 12% of all credit card holders.
3. People fall into a debt spiral. Beyond credit card lending, people who were struggling with their debts in 2010–12 were just as likely to increase their borrowing by 2012–14 as people who were not struggling with their debts. Half of people (50%) who were struggling with their debt were further in debt two years later. The median increase in debt was by £1,506.

High levels of lending now are storing up problems for the future

Ten years after the first signs of the financial crisis, large numbers of people are still dealing with the consequences of reckless lending. The rapid growth of consumer debt is not just causing people problems now but likely to be storing up problems for the future.

The Bank of England has been quick to respond to high levels of consumer lending — what they have called a ‘spiral of complacency’. By requiring banks to hold more capital against consumer lending they have tried to protect banks from the risk of over-lending.

Consumers need similar protection. One opportunity for change is the Financial Conduct Authority’s current investigation into the credit card market.

The regulator could make three changes to the credit card market that would make a difference. First, it should stop lenders from extending people’s credit limit without their express consent. People should not be tempted further into debt by lenders creeping up their limit.

Second, when they do increase someone’s credit limit, credit card providers should do proper affordability checks. Not just checking whether someone has been in arrears but whether they can afford it without struggling.

Third, where lenders have lent people money they can’t afford credit card providers should have to step in to help people repay their debts. Once people have struggled for two years, credit card lenders should give them an affordable repayment plan to help them pay down their debts.

For the majority of people, borrowing helps them to manage their finances — whether that is going on holiday or responding to an emergency. But people who struggle with their debt are often as profitable to lenders as people who manage. That encourages reckless lending. A few changes to the credit card market won’t solve the problem of unaffordable lending, but would make a small difference by encouraging banks not to lend people money they can’t afford.