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 Outline of presentation

• Background.

• Some key concepts.

• Aims.

• Data.

• Findings:– Cross-sectional results.– Panel analysis.– Effects of arrears.

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

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 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 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 Arrears and financial exclusion

  Financial exclusion

Debt status Excluded Not 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 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 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

Snapshot results

12 Credit commitments (BHPS/NMG)

1995 2000 2003

Bank

Owe anything, among individuals 36 36 34

Owe anything, among households 50 51

Median amount owed £890 £2,000

Top quarter £2,700 £5,000

Overall: Heavy burden 3 2

Somewhat of a burden 9 9

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 £1,920 36 54%

Somewhat £3,000 £4,800 £2,490 37 54%

Not £2,000 £3,900 £2,750 40 40%

Doesn’t

owe

£1,720 51 24%

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

5333

2635

2232 42

29

8 1215

113

68

5

2613 9 15

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

All hhlds Allfamilies

Loneparents

Coupleparents

Unknown

50%+

25-50%

10-25%

<10%

Nothing

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 Types of arrears in 2002 (OdS)

4 6 96

11

19

2

4

9

0

5

10

15

20

25

30

35

40

All households Families withchildren

Lone parents

Both

Household bills

Credit

17 Money value of arrears by family type

£295 £300 £290 £270

£385

£740 £700

£890

£665

£880

£0£100£200£300£400£500£600£700£800£900

£1,000

Allfamilies

Loneparents

Couples Non-working

LPs

No-earnercouples

Median Top quarter

18 Direct causes of arrears, self-reported

42

1512 11 9

31

1713 14

10

05

1015202530354045

Loss ofincome

Lowincome

Overlookedor withheld

Increasedoutgoings

Over-committed

All households

All families

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

05

10152025303540

<£7500 £7500-£14999

£15000-£24999

£25000-£34999

£35000+

Gross household income

Per

cen

t in

arr

ears

Any arrrears

Credit arrears

Bills arrears

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 Arrears declining over time, among families with children

0

10

20

30

40

50

60

1999 2000 2001 2002

Year

Per

cen

t in

arr

ears

Lone parents

IS recipients

Workless couples

All families

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 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 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 Segmentation approach for families - simplified (ID3)

Arrears [100]

Saved<£50 [147] Saved £100+ [58]Saved £50-99 [102]

Recent changes Housing tenure

Housing tenure Qualifications

Housing tenure

26

Credit and arrears: changes over time at individual level

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

25

14

16

45

Borrower bothyears

1995-only

2000-only

Neither year

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

31

1818

33 Borrower bothyears

1995-only

2000-only

Neither year

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 Pattern of having arrears in 2001-2002

58 6441

23 22

28

19 1431

0

20

40

60

80

100

120

All families Couples withchildren

Lone parents

Never One year Both years

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

Findings on effects of arrearsPanel results

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% 17%

Couples 19% 20%

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 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 Owe money by BHPS variable age

42

60

55

49

33

18

5

0 10 20 30 40 50 60 70

16-24

25-29

30-39

40-49

50-59

60-69

70+

37 Owe money by BHPS variable sex

38

35

32 33 34 35 36 37 38 39

Male

Female

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

36

53

43

62

23

6

29

31

46

0 10 20 30 40 50 60 70

White

Black - Carib [56]

Black - African [31]

Black - other [22]

Indian [105]

Pakistani [74]

Bangladeshi [22]

Chinese [9]

Other [72]

39 Owe money by BHPS variable religion (ioprlg1)

4429

4032

2920

2718

3142

1921

4335

32

0 10 20 30 40 50

None

C of E

Catholic

Ch Scot

Free Presyb

Methodist

Baptist

Congreg/URC

Other Chr denom

Chris no denom

Islam

Hindu

Jewish

Sikh

Other

40 Owe money by BHPS variable region

4033

3833

293232

3537

4537

3633

40383839

4131

0 10 20 30 40 50

I LondonO London

SESW

E AngliaE Mid

W Mid urbanW Mid

Gr ManMerseyside

NWS Yorks

W YorksYH

TyneN

WalesScotland

NI

41 Owe money by BHPS variable hllt

26

38

0 10 20 30 40 50

Health limitsdaily activities

Not limited

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

2

2

3

4

4

8

9

9

8

9

0 5 10 15

Excellent

Good

Fair

Poor

Very poor

Heavy burden Somewhat