1. Stephen McKay, Personal Finance Research Centre Research completed with Elaine Kempson (PFRC) and Maxine Willitts (DWP – SRD) How much do families owe? Levels of debt among British households SRA evening seminar 26 July 2004

2. 2 Outline of presentation Background. Some key concepts. Aims. Data. Findings: –Cross-sectional results. –Panel analysis. –Effects of arrears.

3. 3 Media frenzy on debt in recent times BBC News: –‘Britain is a nation up to its eyeballs in debt.’ 12.9.03 –‘Credit card debt “still soaring”’ 15.4.04 –‘Consumer debt continues to soar’ 22.04.04 –‘Debt creeps towards £1 trillion’ 29.6.04 Daily Express –‘Debt disaster’ 20.11.02 –‘consumers in massive debt’ 23.4.03 Daily Mail –‘Britons struggling with debt burden’ 21.5.03 Guardian –‘borrowed time’ 30.10.03 Conversely, MORI: –“Credit card debt ‘overstated, over reported and largely a myth’” 20.7.04

4. 4

5. 5 Aggregate picture Rising levels of borrowing, with secured lending growing faster than unsecured –But total wealth remains much larger. Debt as a proportion of income rising over time, with debt/income reaching 130% compared with <80% in late 1980s –Trends similar in other OECD countries Interest payments/income (debt-service ratio) stable since 1999, and half the level of early 1990s. But distributional issues may not reflect the aggregate picture …

6. 6 Long history of previous debt research if you dig deep enough, mostly ad hoc Extensive PSI Survey, Berthoud and Kempson (1992) ‘the rise and rise of consumer credit over the last ten years’ … ‘remarkable rise in number of credit cards in circulation (NCC 1990). ‘Whilst the wealthy use credit as a clever expedient it remains an essential part of the lives of the poor’ (Tebbutt 1983) ‘I have little doubt that 70 to 80 per cent of working-class families supply their requirements on credit’ (Whitelock 1914, Economic Journal). Johnson, P. (1993) ‘Small debts and economic distress in England and Wales, 1857-1913’ Economic History Review 46, pp. 65-87. Hammurabi’s code (1792 to 1750 BC), regulation of credit terms: –“If a inn-keeper gives 60 liters of beer on credit he will receive 50 liters of barley at harvest-time.”

7. 7 Some key concepts explored ‘Debt’: –commitments or arrears; –arrears and financial difficulties; –‘debt’ and financial exclusion. Commitments: –consumer credit and household bills; –secured and unsecured lending. Over-indebtedness –No generally agreed definition, some indicators. Analysis –snapshots and panel data; –households, families and individuals.

8. 8 Arrears and financial exclusion Financial exclusion Debt status ExcludedNot excluded In arrears Use of non-standard lenders with high interest rates. Past history of debt. Using credit cards, etc. over-committed or affected by change in circumstances. Not in arrears Low income cash economy, some careful managers, often older group. Managing financial products with no problems, and/or on a high income.

9. 9 Study aims How many families are in debt? Characteristics of families in debt? What are the changes in levels of debt over time? How do changes in circumstances, e.g. loss of employment, changes in household composition, affect these levels? How does debt relate to movement into work?

10. 10 Data analysed in the study No ideal single source (yet?) Families and Children Study (FACS) – surveys in 1999, 2000, 2001 and 2002 (… continuing). DTI/MORI Over-indebtedness Survey, undertaken in 2002 (OdS) – ‘Kempson Report’. British Household Panel Study (BHPS), 1995 & 2000. ONS 2000 Study of Psychiatric Morbidity Among Adults Living in Private Households. Poverty and Social Exclusion Survey (PSE) 1999.

11. 11 Snapshot results

12. 12 Credit commitments (BHPS/NMG) 19952000 2003 Bank Owe anything, among individuals36 34 Owe anything, among households5051 Median amount owed£890£2,000 Top quarter£2,700£5,000 Overall: Heavy burden32 Somewhat of a burden99

13. 13 Levels of commitment (BHPS 2000) ‘Burden’ of debt Median credit Mean credit Median hh income Average age Has children Heavy£4,000£6,500£1,9203654% Somewhat£3,000£4,800£2,4903754% Not£2,000£3,900£2,7504040% Doesn’t owe £1,7205124%

14. 14 Credit repayments as proportion of gross monthly income (OdS)

15. 15 Proportions in arrears – OdS data/FACS 13 per cent of households in arrears in 2002 (plus 7 per cent in financial difficulties) –18 per cent in past 12 months 22 per cent of families with children in arrears (FACS gives 18%) –30 per cent in past 12 months 36 per cent of lone parents in arrears (FACS gives 35%) –48 per cent in past 12 months

16. 16 Types of arrears in 2002 (OdS)

17. 17 Money value of arrears by family type

18. 18 Direct causes of arrears, self-reported

19. 19 Higher gross incomes reduce the likelihood of arrears (families with children)

20. 20 Arrears were more likely for families with children … Among younger groups (esp. for consumer credit). Among tenants. Where they had multiple credit commitments. Among larger families. Among families in hardship – a ‘depth’ measure. In more deprived areas. Where people had mental health problems of various kinds (probably effect as well as cause).

21. 21 Arrears declining over time, among families with children

22. 22 Multivariate analysis of having arrears Logistic regression model of being in arrears. Wide range of factors having additive effect on modelling a bivariate outcome (arrears, or not) Alternatives – look at each type of arrears separately, tobit model of extent of arrears (Bridges/Disney 2004), two-stage models of credit acceptance then arrears, tree-based approaches.

23. 23 Main findings on being in arrears – FACS data Results control for a range of different variables. Having savings drastically decreases risk of arrears. Low income significant, but not above bottom quintile. Drops in income in last year associated with arrears (improving circumstances no effect). Tenants more likely to have arrears. Also – health, age, region.

24. 24 Main findings on being in arrears – OdS data on all households Results control for a range of different variables. Tenants more likely to have arrears. Age group. Drops in income. Having a current account. Number of active credit commitments.

25. 25 Segmentation approach for families - simplified ( ID3 ) Arrears [100] Saved<£50 [147]Saved £100+ [58]Saved £50-99 [102] Recent changesHousing tenure Qualifications Housing tenure

26. 26 Credit and arrears: changes over time at individual level

27. 27 Borrowing tends to persist, with turnover (BHPS 1995 & 2000)

28. 28 Borrowing tends to persist, with turnover higher for 20-59 year-olds (BHPS 1995 & 2000)

29. 29 Arrears often short-lived (FACS) One family in three (34%) with arrears in one year didn’t have them the next. Conversely, one family in four (26%) without arrears in one year did have them the following year. Arrears on household bills are more persistent than on consumer credit (under half, compared to more than half, exit such arrears each year).

30. 30 Pattern of having arrears in 2001-2002

31. 31 Patterns of arrears 1999 – 2002 Lone parents and low-income couples with kids in all 4 surveys.. Arrears in 3/4 years: 34%, 1/2 years: 37%, never: 29%. LPs: 40% in arrears for 3/4 years, compared with 28% of low-income couples Higher arrears incidence with: –presence of younger children; not being in paid work; poor health; social tenants

32. 32 Findings on effects of arrears Panel results

33. 33 Arrears and transitions into work Concern that moving into work is hampered by indebtedness, or that the transition may trigger borrowing or arrears. Lenders’ policies (and borrowers’ attitudes) could mean that effects operate in different directions. Limited FACS evidence to support either effect 2001-02 transition into work With arrears No arrears Lone parents 17% Couples19%20%

34. 34 Arrears and wider effects Having arrears associated with leaving paid work (though limited transitions to investigate). Family formation: –couples twice as likely to split during 2001-02 where there were arrears (esp. rent arrears, arrears on bills); –lone parents with arrears perhaps slightly more likely to re-partner (perhaps reflecting younger age group in paid work).

35. 35 Main conclusions Still confusion about what is meant in discussions of debt and over-indebtedness. Growth of credit remaining strong. Still only a small proportion experiencing credit difficulties (particularly arrears). Considerable annual change in arrears and borrowing among people. Effects of debt – few strong substantiated effects.

36. 36 Owe money by BHPS variable age

37. 37 Owe money by BHPS variable sex

38. 38 Owe money by BHPS variable ‘race’, sample N in [ ]

39. 39 Owe money by BHPS variable religion (ioprlg1)

40. 40 Owe money by BHPS variable region

41. 41 Owe money by BHPS variable hllt

42. 42 Repayments a burden by BHPS variable hlstat (health status)