Indebtedness in Wales

Almost all of us borrow money at some time in our lives.  Victoria Winckler looks at why people on low incomes are hardest hit.

Whether it’s a mortgage, a credit card, a car loan or some furniture on ‘interest-free credit’, borrowing is pretty much the norm especially for people of working age. 

For a substantial minority of people, however, borrowing is a real problem. 

The Bevan Foundation was asked by the Public Policy Institute Wales to undertake a short review of existing literature on problem debt – you can read the report  here.

We found shocking levels of debt.  A recent survey by the Money Advice Service estimated that about 1 in 6 people in Wales (16%) had problem debt, that is they were either insolvent or in arrears with credit repayments, or feel that their debt is a heavy burden.  In some parts of Wales, notably the south Wales valleys and the north Wales coast, the proportion of people in problem debt is very much higher. It’s also higher amongst young people and women.

As a review of existing research, this report pulls together a lot of information rather than unearthing anything new.  What it usefully does is frame the problem – it hopefully helps Ministers and anyone else interested to get a better grip on what is clearly a very widespread problem in some communities. 

It’s clear that there is a very close association between having problem debt and having a low income. Having a low income doesn’t cause debt – but it makes it very much more likely. We found that the evidence shows there are three types of trigger which tip people into debt:

• changes to income e.g. from unemployment or delays or cuts to benefits;
• changes in personal circumstances e.g. relationship breakdown
• sudden unexpected bills. 

What protects people from debt becoming a problem is:

• having savings
• having financial skills.                                                                             

This is a multiple whammy if you are cash-poor. 

Not only do people on low incomes have less money to spare, they are also more likely to experience unemployment or rely on benefits, and are less likely to have savings and on average have fewer financial skills. 

A minority turn to high cost lenders, usually because they have been refused mainstream credit like an overdraft. Such lenders typically make a bad situation worse, with the combination of high interest rates, use of roll-over loans and direct deductions from bank accounts.

Tackling high cost lenders (and illegal lenders too) is very important – but it doesn’t solve the underlying problem of why people use them in the first place. The challenge is to get upstream and make sure people don’t get into unmanageable debt before they are tempted by Wonga or Shopacheck etc. 

So, secure, decently-paid work. A full entitlement to benefits, with the correct amount paid on time.  Advice for those who don’t get what they are due. And efforts to reduce demands by public and private sector bodies alike for lump-sum payments up front, whether it’s a term’s travel on the school bus or dental treatment. There is a good reason why pay-as-you-go is popular amongst people on low incomes, whether it’s phones or electricity – it is easy to manage with modest means. 

There should be steps to build resilience too. 

Education about financial matters for the people at greatest risk of debt or at key trigger points in people’s lives.  And encouragement and reward to build savings no matter how modest. 

And, if and when people do need credit, then low-cost options should be available outside mainstream lenders.  If the demand for all but occasional credit was choked off, then high-cost lenders would wither and die – they simply wouldn’t have the custom. 

This isn’t about ‘molly-coddling’ people – it’s actually enabling them to have greater control of their affairs.  And it could save a lot of public money and human misery at the same time too.  The various bits of Welsh Government are already doing some of these things, although they’re not particularly joined up and there are some gaps at the moment.

While the trend in borrowing and in problem debt is generally downwards, not least because lenders have dramatically tightened their credit checks, it’s unlikely to continue in that direction. The Money Advice Service’s survey was done before the major changes to benefits (‘bedroom tax’ and Personal Independence Payment for example) took real effect. Universal Credit, when it is eventually introduced, will be paid to a single person, in a lump sum, in arrears, putting much bigger demands on people’s ability to manage a very modest budget. 

The high-cost lenders are said to have based their business model on the impact of welfare reform. The challenge is for the Welsh Government, local authorities, social landlords and advice services to get ahead of this most insidious curve.

Victoria Winckler is Director of the Bevan Foundation 

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