Grahame Whitfield (Chris Dearden, Jackie Goode and Lynne Cox) Centre for Research in Social Policy

1. Credit and Debt in low-income families in the UK Spend, save or borrow: how families are coping?28 June 2010 Grahame Whitfield(Chris Dearden, Jackie Goode and Lynne Cox) Centre for Research in Social Policy

2. Context • Global ‘credit crunch’: sustained period of readily available credit - then recession, increasing living costs/unemployment & new political & financial landscape. • Static/cross-sectional research: provided little understanding about how people on (persistent) low incomes use & perceive credit/debt over time. • ‘Poverty dynamics’ approach: to unpack complex inter-relationships between ‘poverty’ and ‘debt’, and provide new insights.

3. Aims of study • Explore types of credit and debt people used and lived with (their definitions); • Look into ways in which people became indebted; • Examine how people managed indebtedness; and • Describe impact on people of living on low income and with indebtedness over time. • Offer some indications of responses for range of stakeholders which might improve the circumstances of people living on persistent low incomes.

4. A dynamic approach • 57 people/households (12 case studies), including: • long term benefit receipt; • long term low-paid employment; and • ‘churners’ (a problematic term). • Kept in touch over a 12 months: • Initial home interview; • Follow-up every 2 months; and • Focus on identifying ‘significant events’ (triggers). • Final home interview (50) & ‘check back’ workshops

5. Understanding indebtedness • Unsolicited credit for young on low incomes • Low levels of financial literacy • Inadequate income rather than ‘consumerism’ • Cost of family (re)formation, setting up home • Legacy of (ex-)partners debts • Families with children at greater risk • Ongoing impact of efforts to ‘rise’ • Loss of income & ‘shocks’ once living with debt

6. Lender/Creditor behaviour • Pushing of ‘easy’ credit to people with no checks regarding ability to repay. • Excessive bank charges for unauthorised overdrafts, often caused by unpredictable Direct Debits. • Inflexibility of lenders when unable to repay. • High utility charges for those least able to afford them. • Fixed time contracts for mobile phones, media package, utilities, etc. with expensive exit charges.

7. Money Advice & Saving • Only some had used money advice: One-off appointments insufficient, more frequent meetings required. • Incentives to save viewed positively, but many found this impossible: Short-term saving for specific items more manageable than ‘rainy day’ saving • All would need instant access to savings.

8. Positive factors • Sustained v sporadic vulnerable work • Financial literacy/budgeting skills • Resistance to credit, determination & resilience • Savings acting as a ‘buffer’ (rare) • Impact of money advice high (rare) • Creditor attitudes and practices

9. What needs to be done? • Recognise complexity of people’s lives and not addressing single issues in isolation • Improve financial literacy - for all. • Ensure the financial sector do their bit. • Really make work pay for those who can and “protect those who can’t” • Recognise recession and planned/future spending cuts means this will become relevant to more people

10. Financial literacy • Raising financial literacy in & beyond school • Particular issue of financial literacy of young people and impact later in life • But also for people throughout life and during difficult periods • Providing ongoing flexible money advice support, not one-off appointments

11. Doing their bit • ‘Hardening’ of eligibility criteria should not make people on low incomes vulnerable to: • targeting by informal lenders; • excessive charges from mainstream lenders • Relax criteria for provisions like the Savings Gateway • Address utility costs, direct debit payments and fixed- contract issues. • Explore affordable credit solutions

12. Avoiding the ‘debt trap’ • Using credit a necessity & constant burden • Sustainable well-paid work route out of poverty • Raising benefit and minimum income to ‘living wage’ (ala MIS) to avoid ‘debt trap’. • Otherwise, ability to meet commitments will remain limited, increase problematic debt and impact on willingness to take up work/training.

13. Closingthought It would be counterproductive if efforts by the government and financial sector to deal with the ‘borrowing culture’ in the general population had its greatest detrimental impact on those who have to use credit to meet their day-to-day needs.

14. Centre for Research in Social PolicySchofield BuildingLoughborough UniversityLoughboroughLeicestershireLE11 3TUTelephone: +44 (0)1509 223372crsp@lboro.ac.ukwww.crsp.ac.uk