Context:

The recession of 2008 followed a period of readily available credit coupled with rising household indebtedness across the United Kingdom. The recession caused a tightening of credit availability, rising unemployment and increases in the cost of living. This disproportionately affected those households on low incomes.

The study:

This report aimed to:

• Explore the credit and debt profiles of people living on low incomes
• Explore how people became indebted and managed their subsequent indebtedness
• Describe the impact of living with over indebtedness for a sustained period of time
• Give suggestions to government and the financial sector on how the circumstances of people living on low incomes may be improved

The study used a longitudinal qualitative design, allowing repeated contact and interviews with participants from 57 households over a 12-month period. Recruitment was undertaken in the Midlands, in areas identified as having a high percentage of low-income households. The sample design targeted three groups: ‘long-term out of work benefit recipients’; ‘long-term low-waged households’; and ‘households who [switch] between work and benefits’. These groups were further divided into those with and those without dependent children in the household. All participants were aged between 20 and 60. Only households with an annual income of below £20,000 were considered, but a large majority had incomes below £15,000, with almost half receiving less than £10,000 a year. The fieldwork involved:

• Initial in-depth face-to-face interviews with each of the 57 households to obtain baseline information and enable selection of case study participants
• Case studies: following the initial interviews 12 households were selected as case studies and interviewed face-to-face every two months
• Follow-up interviews: The remaining households were interviewed briefly by telephone every two months
• Final interviews: At the end of the 12-month period, the remaining participants (50 out of 57) were all re-interviewed
• Discussion groups: 21 of the households were represented at final discussion groups to give final feedback and help shape policy recommendations

Key findings:

• The findings highlight that key points in peoples’ lives are identified as ‘risky’ in terms of debt acquisition
• The significant long-term negative impacts that life events and financial decisions made early in life can have are also emphasised
• Many participants stated that their credit problems stemmed from unsolicited offers of credit (loans, credit cards, overdrafts, etc.) in their late teens and early twenties, when they were ill-equipped to deal with their own finances or understand the implications of their actions
• Once living with debt, people on a low income found budgeting and financial management extremely difficult, and their circumstances often prevented them from meeting their current commitments or avoiding further high-cost borrowing
• Participants were critical of many lending practices, including bank charges, overt marketing and high levels of interest on products specifically aimed at people on low incomes
• Prolonged indebtedness had an effect on the emotional health and mental wellbeing of participants, which in turn further exacerbated over-indebtedness
• The research strongly supports the evidence of the ’debt trap’, or the debt cycle
• Even very modest savings helped people avoid indebtedness, and while money advice was not commonly taken up it had a positive impact on those who did seek and act upon advice
• However, the main way that people were able to successfully manage and reduce their debts was through the ability to work and maintain a reliable income over a long period

• It is essential that low-income households have access to readily available and affordable low cost (or no interest) credit
• Benefit and minimum wage levels are inadequate, and insufficient to sustain a minimum standard of living in the medium to long term
• There is a need for sustainable well-paid employment as well as focused support for people undertaking training and education
• There is a clear need for debt and money management advice to be delivered in the most disadvantaged areas, as well as to people in low paid or sporadic employment
• The report supports the idea behind the EU 2006 initiative to reduce cost differentials between payment methods for utilities and bills

Points to consider:

• Attention was given to preserving the sample, resulting in a very low attrition rate over the lifetime of the research.

• This report is relevant to all stakeholders and policymakers with an interest in credit use and debt among low-income households, and particularly to those who are commissioning or planning interventions in this area

• The research, while thorough, is based solely on qualitative interviews in one geographic region of the United Kingdom. Its findings cannot be readily generalised to the rest of the UK without further research
• The findings are now dated and caution must be exercised when applying them to the current financial landscape. However, some of these points will still be pertinent