Debt Management

DM 24

Supplementary written evidence submitted by Dr John Gathergood, University of Nottingham

1. This supplementary written evidence accompanies the oral evidence I presented to the Committee at the first evidence session on debt management on Tuesday 22 November 2011. At that session I undertook to provide the committee with additional statistics relating to personal insolvencies and household debt in the United Kingdom.

2. Turning first to the overall level of unsecured debt in the United Kingdom, Figure 1 below illustrates the evolution of the level of total outstanding unsecured lending to individuals since the beginning of 1998. At current prices the level of outstanding unsecured debt increased from £90 billion in 1998 to a peak of £240 billion in 2008, before beginning to fall back from early 2009 onwards.

3. Adjusting for inflation using 1998 constant prices, the value of total unsecured debt began to plateau in mid-2005 at approximately £160 billion. A similar pattern emerges when total unsecured debt is illustrated as a proportion of household income.

4. On this basis, mid-2005 can be seen as the peak of expansion of the UK unsecured debt market. Post-2005 the level of unsecured debt began to fall slightly before a small up-tick prior to the onset of the recession in 2008. Since early 2008 total unsecured debt as a proportion of household income has fallen from 100% to 70% by the third quarter of 2011.

5. Figure 2 below illustrates quarterly data for the total number of personal insolvencies originated since the beginning of 2001 plus a breakdown by the three types of personal insolvency in the UK.

6. From this figure, it can be seen that the total number of personal insolvencies each quarter was below 10,000 until mid-2004, after which the number of cases grew rapidly to over 25,000 per quarter by 2007. It is notable that the increase in overall numbers comprises both increases in personal bankruptcies and IVAs, so is unlikely to be explained by the change in personal bankruptcy law which took effect in 2004.

7. The number of personal insolvencies fell slightly after 2007 before rising sharply since the onset of the recession and peaking in early 2010 at 35,000 per quarter, only in small part attributable to the introduction of Debt Relief Orders in early 2009. There has subsequently been a sharp decline in the number of bankruptcies originated per quarter which has caused the total number of personal insolvencies to fall by 6,000 per quarter.

 

8. The distribution of unsecured debt across the population is very uneven. The most comprehensive data on unsecured debt usage at the individual level are held by credit reference agencies which are not publicly available. The next best source of data is the Wealth and Assets Survey which surveys 70,000 UK individuals on their financial position every two years. The most recent release of the data covers the period 2006-2008. A detailed analysis of this data is presented in ONS Wealth in Great Britain. For the purposes of this written evidence I provide some more up to date summary statistics from the quarterly YouGov Debt Track survey from the period 2010/11.

9. Approximately 75% of individuals in the UK population hold an unsecured credit product, such as a credit card, bank overdraft or personal loan. However, at any time only 40% of individuals have a positive outstanding balance. The other 35% hold a credit product without borrowing on it, such as holding a credit card but not using it for purchases or having the option of a bank overdraft but not using it.

10. Those who borrow on unsecured debt are typically adults aged in their late twenties to mid-thirties. For example, 57% of 26 to 35 year olds borrow on unsecured debt, compared with 27% of over 55 year olds. Those who borrow are typically married, in work, have a spouse/partner who is in work and have children.

11. There is little difference in the proportions of men and women who hold unsecured debt, or in the levels of debt they hold. Women are slightly more likely to hold unsecured debt than men, but men who hold unsecured debt typically hold slightly more debt. There is, however, more variation between men and women in the types of unsecured held. Women are more likely to hold store cards (17% compared with 6%) and are more likely to hold mail order catalogue debt (13% compared with 4%).

12. Those with lower incomes who hold unsecured debt tend on average to hold the highest levels of unsecured debt relative to income. At the household level, those households in the bottom two quintiles of the income distribution who have unsecured debts typically hold unsecured debts equivalent to 30% of their annual household income. For households in the next two quintiles the equivalent value is 20%. For households in the top quintile the equivalent value is 14%.

13. Problem debt is also more prevalent among those households with lower incomes. In the bottom two quintiles of the income distribution 25% of households with unsecured debts are at least one month in arrears. For the next two quintiles the equivalent value is 14%. For households in the top quintile the equivalent value is 8%.

14. Among those individuals at least one month in arrears on unsecured debt (18% of those with outstanding unsecured debts) 23% have experienced a period of unemployment within the last year, 11% have become divorced within the last year, 8% have seen an increase in the number of dependent children in their care within the last year and 6% have begun an incapacity-related benefit claim within the past year.

15. Among those individuals at least one month in arrears on unsecured debt 25% are unable to perform a simple interest calculation (15% of £1000). The equivalent proportion among those without unsecured debt arrears is 16%. Among those one month in arrears 55% do not understand compound interest and 70% do not correctly understand the term ‘minimum payment’ on a credit card. The equivalent values among those without unsecured debt arrears are 44% and 50% respectively.

30 November 2011