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Economic Justice

The true cost of debt

Cross-party think tank Demos has launched a new report making an important contribution to the debate about different types of personal debt.  The Borrowers, supported by Barrow Cadbury Trust, reveals £5bn of hidden debt and calls for a ‘Harm Index’ – which would include payday loans, council tax and rent arrears, and overdue utility bills – to measure the impact, as well as recommending the FCA introduces a food packaging-style traffic light system on all credit products and adverts to improve borrowers’ awareness of risks.


A change to the levy system is also one of a number of proposals put forward as part of a ground-breaking analysis of Britain’s household debt crisis. It comes just days before the FCA takes over as regulator for the consumer credit industry on 1 April – overseeing credit cards, payday loans and debt collection firms.  Under current FCA regulations mortgage providers pay the highest levy, used to fund financial education and debt advice for struggling borrowers, due to their lending the most amount of money.


However, a new ‘Harm Index’ developed by Demos to reveal the true impact of various debts – combining financial, emotional and social consequences – finds that mortgages are relatively stress-free when compared with other more harmful forms of borrowing.  Demos asked people to rank each of their debts based on their negative impact such as legal consequences, mental wellbeing and affordability. Mortgage debts were given a Harm Rating of just 23 out of 100. By comparison the types of debt that people felt had the greatest negative impact included Payday Loans (68), Council Tax Arrears (62), Utility Bills (57) and Doorstep Lending (50).


Demos polling of 1,775 adults also revealed:


  • 88% of adults were in some form of debt, but the majority have never accessed any support to help with their money worries.
  • The most common reasons for borrowing money were a one-off purchase (36%) and to cover an unexpected expense (34%). Almost a quarter of people (23%) had used debt to afford everyday essentials.
  • Over three times as many young people than pensioners are bearing the brunt of increasing debt. 55% of 18-24 year olds, and 48% of 25-34 year olds, said that their debt had increased over the past five years, compared to only 13% of over-65s.


Britain’s £5bn of hidden debt

The Demos analysis reveals that total arrears, combining unpaid rent and council tax, and overdue utility bills such as gas and electricity, comes to £4.7bn – almost £200 per household. However, official debt figures for the UK currently ignore arrears, which Demos’s Harm Index classes as a high-impact debt, instead choosing to calculate only consumer credit such as credit cards and bank loans.


Figures show that 9% of people face rent arrears while 11% are behind on their utility bills – almost double the number who have turned to payday loans (6%). The findings led Demos to call for the official measure to acknowledge arrears in order to achieve a complete picture of the nation’s debt problem and ensure those struggling with arrears receive targeted advice.


The report also recommends:


  • Giving borrowers a legal right to negotiate directly with their creditors before missing payments or reaching crisis point – something current lending systems often don’t allow.
  • The FCA and OFT should replicate best practice used by utility companies to implement a ‘three strikes’ approach on less flexible forms of debt such as arrears and mortgages.


Jo Salter, a researcher at Demos and author of the report, said:


“It is only fair that lenders whose practices cause the most harm to individuals should either contribute the most to funding debt advice or take steps to minimise their negative impacts.


“There is a £5bn black hole in official debt statistics and our research shows just how arrears on rent, council tax and utility bills often have just as big a negative impact on people as payday lending.


“Deciding which forms of debt are ‘bad’ and need stronger regulation should not be based on industry definitions. It should be judged by looking at what types of debt cause people the most stress, disrupt their relationships with those around them, and undermine their capacity to help themselves – because this is the reality of debt problems.” You can read a blog by Jo Salter about The Borrowers report here.


Sara Llewellin, Chief Executive at Barrow Cadbury Trust, said:


“The Barrow Cadbury Trust welcomes this timely report on debt from Demos, particularly the focus on the individual and the recommendation that debt statistics should include unpaid rent, council tax arrears and overdue utility bills.


“Also of concern to the Trust is the impact of debt on an individual’s emotional resilience and quality of life as well as the communities in which they live.”