Context

The Financial Conduct Authority (FCA) has a particular focus on the way that firms can help consumers cope with unexpected life events. It is concerned that consumers face particular risk of financially vulnerability when they are made unemployed or leave employment due to retirement, long-term sickness or disability. The concern has become more acute with the recent cost-of-living pressures, following a period of growth in household borrowing, and resulting in many more UK consumers finding their household finances being squeezed.

The report refers to credit use in relation to interest-bearing unsecured credit such as credit cards, overdrafts, personal loans and payday loans. It uses credit arrears as a proxy for financial distress, and defines this concept based on three measures:

• payments missed by 30 days beyond the scheduled payment date
• payments missed by 60 days beyond the scheduled payment date
• ‘delinquency’ (after 90 days in arrears, if they have a county court judgement (CCJ) against them, if they are declared bankrupt or an account is passed to a debt collector).

The study

The study was undertaken by the FCA to explore how transitions out of employment impacted consumers’ credit use and arrears. The research question the study set out to address was:

“Do consumers fall behind on their payments for loans or credit cards or do they choose to take out more credit products to maintain levels of spending?”

The study used data from a major UK longitudinal survey, Understanding Society, from June 2009 to April 2021, which was matched with survey respondents’ permission to data from credit files. The authors limited their analysis to individuals who had experienced none or at most one transition from employment during the period covered by the data so as to minimise the effects of re-entering employment on the clarity on the results. The final sample available for the analysis was 16,356 adults aged 18 and over, which was analysed using within-subject fixed-effects regressions.

Key findings

Statistical significance was reported throughout at the 95% level of confidence (p<.10).

• Consumers were significantly more likely to miss credit payments if they had become unemployed (by a factor of 1.9) or left employment due to long-term sickness or disability (by 2.7 times) than their counterparts who did not experience these events.
  • Going into arrears on credit payments peaked at around five-months following these types of transitions out of employment, and was more persistent (for up to a year) for those who became unemployed than those who left due to long-term sickness or disability.
• Retirement was not independently associated with missing credit payments, most likely because retirees usually access pensions or state benefits.
• Leaving work due to family or caring responsibilities or full-time education did not affect the likelihood of missing credit payments.
• Being made unemployed and leaving full-time employment did not result in a significant change in the use of unsecured credit products.

Points to consider

Methodological strengths or limitations:

• The authors note that the analysis provides evidence of the average change in outcomes, rather than proving a causal link.
• The outcomes measures related to specific credit product types and did not include informal borrowing. The precise range of credit products included in the analysis is not given.
• The authors note that data matching and an unbalanced panel survey mean that the resulting sample was not necessarily representative of the population.
• The authors also note that their analytical model did not control for re-entry to employment within the period covered by the data, which might have biased the coefficients.
• The report does not clearly specify if the sample universe included all adults aged 18 and over, working-age adults, those in employment or just those in full-time employment (the latter is referred to once in the report’s key findings section).
• There is limited reporting of the results of analysis of credit use outcomes.

Applicability:

• The empirical insights, and the policy implications considered in the report, should be of interest to a wide range of stakeholders, including policymakers, employers, practitioners who support people facing financial difficulties, and researchers.

Relevance:

• The findings are relevant given the difficult macro-economic context of the UK and the financial squeeze on individuals and their households.

Generalisability/transferability:

• The study draws inferences from significant longitudinal and robust data which suggests it should generalise reasonably well over time, subject to the limitations noted above.