Research Library
Stuck in Debt: How do people get trapped in problem debt?
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Context
Ten years after the financial crisis, personal finances are still stretched. Inflation is rising, savings are at an all-time low, and consumer borrowing is rapidly increasing. The increase in borrowing becomes a problem – for both creditors and debtors - when people are unable to make their repayments. The impact of problem debt is severe and wide-ranging. In 2016, Citizens Advice helped 350,000 people who were struggling to repay their debts.
The study
Citizens Advice conducted this study in 2017. The study explores how people get into debt in the first place; whether it is a short-term or a long-term problem; and the type of people most likely to struggle with problem debt. The report states that lenders, the Financial Conduct Authority, and the government have a crucial role in both helping people stay on top of their debts and getting their finances back on track when they fall into difficulties. It offers four detailed recommendations to help people when they are struggling with problem debt.
The study used a range of resources, including:
- Analysing two waves of the Bank of England’s NMG survey
- Analysing four waves of the Wealth and Assets Survey
- Conducting a representative poll of 2,116 adults
- Conducting a survey of 272 Citizens Advice advisers
In this report, a person is defined as in problem debt if they are unable to afford their debt repayments. This was measured by looking at people who said they:
- Were in arrears on their outstanding debt obligations
- Were struggling to meet their debt repayments
- Said their debt is a heavy burden.
When somebody was in this situation for more than a year, they were described as ‘stuck’ in problem debt.
Key findings
- 2.9 millions households were struggling with problem debt in 2016.
- While many households who experience problem debt are able to get their finances back on track within a year, a significant minority get stuck in debt, or enter into ‘debt spirals’ (where they borrow more despite already struggling). Of the 2.9 million households reporting debt in 2015, almost half were still reporting problems in 2016.
- In some cases, problem debt persisted. 800,000 people had continuous debt problems for at least five years between 2006 and 2014.
- People get stuck in debt as a result of:
- Credit card use can mean that people stay in debt for longer. Between 2010-12 and 2012-14, almost three-quarters (72%) of over-indebted people with loans reduced their loan debt, while just three-in-five (60%) of those with credit card debt were able to reduce their credit card debt.
- Half of people in problem debt take on further debt, averaging £1,506 more over two years, while interest and other fees can increase their debt further.
- In 2016 almost one-in-five people (18%) in problem debt had their credit card limit extended automatically.
- in 2016 only one-in-ten people (10%) in problem debt sought advice.
- 38% of the 272 Citizens Advice advisers surveyed said they had helped people who had had their debts enforced, despite having set up a debt management plan. The report concludes by offering several recommendations, including:
- Lenders should not be allowed to increase a credit limit without a customer’s permission.
- Lenders should scrap unarranged overdraft fees.
- Money advice should be provided at key moments in people’s lives.
- Debt management plans should be legally enforceable.
Points to consider
- The report uses national surveys (including from ONS) so the results should be robust. However, the report does state that the figures on the amount of debt people hold are from the Wealth and Assets Survey which ‘under reports the total amount of debt’. The report does not elaborate on this.
- This report is relevant to all stakeholders and policymakers, including lenders and people struggling with problem debt themselves, who are concerned with tackling problem debt in the UK.
- The results of this research can be seen as representative of the adult population of the UK.