The number of households struggling with problem debt grew by a quarter in two years, as stagnating wages forced a growing number to borrow money.
A report commissioned by the TUC and Unison shows that in 2014, one in eight households (3.2 million) were over-indebted compared to one in ten (2.5 million) in 2012.
‘Britain in the Red’ shows that young people, the self-employed and low-income families have been the hardest hit by the rise in problem debt.
Problem debt is defined as having to spend 25 per cent or more of monthly gross income on unsecured debt repayments (credit card debts, loans and overdrafts) other than mortgage or rent payments.
The report said 1.6m households were spending 40 per cent of their gross income on repaying non-housing debts. Of those, 1.1 million earned less than £30,000 a year.
Borrowing on credit cards, loans and overdrafts fell with the onset of the financial crisis and has not returned to pre-crisis levels, but the unions said a fall in real wages meant debt-to-income ratios remained high.
The report reveals:
- In 2012 just 2 per cent of 18-34 year-olds with any form of unsecured borrowing were over-indebted, but by 2014 this had risen to 10 per cent. Credit card, personal and payday loans, overdrafts and store cards were the main factor behind the increase in problem debt not student loans.
- In 2012, six per cent of self-employed workers with credit commitments were in serious debt. But by 2014 this had nearly tripled to 17 per cent.
- The number of low-income families with problem debt shot up from nine per cent in 2012 to 16 per cent in 2014.
- People who took out payday loans in 2014 spent, on average, 30 per cent of their income repaying them – up from 12 per cent in 2012.
- In 2014 households with store cards spent 21 per cent of their income repaying them – up from nine per cent in 2012.
The research was based on analysis of household surveys including an annual report for the Bank of England.
The TUC and Unison said the report revealed how economic growth had failed to reduce the burden of debt for many families. The TUC’s general secretary, Frances O’Grady, said the fact that more people were in problem debt was particularly worrying given that interest rates might rise in the coming months.
“Rising household debt is not the sign of a healthy economy. People raiding their piggy banks and borrowing more than they can afford is what helped drive the last financial crash,” she said. “We need a wages-led recovery that works for everyone, not another debt-fuelled bubble.”