WWW.IPPR.

ORG

StrengthAgainst
Shocks:
Low-incomefamiliesanddebt
DaliaBen-GalimandTessLanning

February2010
©ippr2010

InstituteforPublicPolicyResearch
Challengingideas– Changingpolicy
2 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Aboutippr
TheInstituteforPublicPolicyResearch(ippr)istheUK’sleadingprogressivethinktank,
producingcutting-edgeresearchandinnovativepolicyideasforajust,democraticand
sustainableworld.
Since1988,wehavebeenattheforefrontofprogressivedebateandpolicymakinginthe
UK.Throughourindependentresearchandanalysiswedefinenewagendasforchangeand
providepracticalsolutionstochallengesacrossthefullrangeofpublicpolicyissues.
WithofficesinbothLondonandNewcastle,weensureouroutlookisasbroad-basedas
possible,whileourGlobalChangeprogrammeextendsourpartnershipsandinfluence
beyondtheUK,givingusatrulyworld-classreputationforhighqualityresearch.
ippr,30-32SouthamptonStreet,LondonWC2E7RA.Tel:+44(0)2074706100E:info@ippr.org
www.ippr.org.RegisteredCharityNo.800065

ThispaperwasfirstpublishedinFebruary2010.©ippr2010

Abouttheauthors
DaliaBen-GalimisaSeniorResearchFellowandTessLanningaResearcheratippr.

Acknowledgements
TheauthorswouldliketothankTonyDolphin,KayteLawtonandKateStanleyatipprfor
theirinputtothispaper.ipprisgratefultoFriendsProvidentFoundationfortheirgenerous
fundingoftheConsumerSpendingandDebtproject.
Finally,abigthankyougoestoallthefamilieswhotookpartintheresearchfortheirtime
andinput.
3 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Contents
Executivesummary ............................................................................................................. 4
Introduction......................................................................................................................... 7
Theexpansionofcredit ...................................................................................................... 7
Triggereventsandaspiralofdebt ..................................................................................... 8
Thedailyrealities:consumerspendinganddebtonashoestring ................................... 12
Choices,attitudesandthe‘sub-prime’problem .............................................................. 14
Policyrecommendations ................................................................................................... 17
Conclusion.........................................................................................................................19
References......................................................................................................................... 20
Appendix:Researchmethodologyandprofileofthesample .......................................... 21
4 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Executivesummary
Thecurrenteconomiccrisishascastasharplightonbroadculturaltrendsacrossallincome
groups.Consumer-ledaspirationsandanationalobsessionwithhome-ownershiparedeep-
seatedculturaldevelopmentswithbothsocialandeconomicdrivers.Butformanyfamilies,
havingaccesstoproductsandhomesmeansrelyingheavilyondebt.
Inthedecadeto2008,averagehouseholddebtintheUKincreasedsubstantially– from93
to161percentofdisposableincome.Theprofileofborrowerswidenedtoincludelower
incomegroups,whichsomesuggesthasledtogreateropportunitiesforsocialandeconomic
inclusion.Butlow-incomehouseholdsaretheonesthataremostvulnerabletodebt
problems,andippr’snewresearchillustratesthatourrelianceondebt–farfromcreating
opportunity–hascreatedvulnerabilityduringthisrecession.
ippr’sinnovativeresearchwith58low-incomefamiliesinLondon,Newcastle,Nottingham
andGlasgowaimedtounderstandwhattheexpansionofhouseholddebthasmeantforthe
livesoflow-incomefamilies.In-depthinterviews,anincomeandexpenditurediaryand
regulartelephoneconversationsoverfourmonthsexploredpatternsofincome,spendingand
borrowing.
ThisisthefirsttimetheUKhasenteredarecessionwithfamiliesfromallincomegroupsin
considerabledebt.Reflectingwidertrends,43percentofthelow-incomefamiliesinippr’s
researchwerehomeowners;59percenthadcreditcards;25percenthadstorecards;and47
percentusedmailordercatalogues.Theexperiencesofmanyofthefamiliesalsosuggest
thatso-called‘extortionatelenders’arestillusinghighpressuresalestechniques,targeting
peopleinfinancialdifficulty.
Ourresearchfoundthatnotalllow-incomefamiliesuseconsumercreditorgetintodebt,
butpovertyandjobinsecurityincreasevulnerabilitytodebtproblems.Lowpayandcertain
contractualconditionssuchastemporaryandzero-hourcontractscancreateconsiderable
financialinsecurity.Ourfindingsalsoshowhowfinancesarestrainedbyeveryday
occurrences–abrokenwashingmachine,aleakingpipe,oranunexpectedlyhighbill–and
seasonalandoccasionalpressuressuchasChristmasandbirthdays.
Savinginadvancecanhelpfamiliesdealwithfluctuationsinincomeandexpenditureand
shouldbeencouraged.Butforwardplanningisnotalwaysrealisticforfamiliesonlow
incomesorinfinancialdifficulty.Somefamilieswillneedaccesstocreditinordertoplan
ahead.Theextensionofcreditandmortgageswasborninpartoutofrecognitionthatthere
cannotbeonesetofrulesforpoorpeopleandanotherforeveryoneelse.Ourresearch
illustratestheneedtocombinemarketregulationswithmeasurestoprovidefairand
sustainablealternativesforallhouseholds.
Themaincauseofahouseholdfallingintoproblemdebt,arrearsandrepossessionisafallin
itsincome.Overaquarterofippr’sresearchparticipantsexperiencedafallintheirhousehold
incomeduringtheresearchperiod,andasignificantproportionhadexperiencedasudden
lossofincomeinthepastasaresultofredundancy,relationshipbreak-uporillhealth.Our
findingsshowhow,facedwithareductioninearningsoverasustainedperiod,anysavings
arequicklyusedupanddebtandarrearsoftenspiraloutofcontrol.
Wefoundthatmortgage-holdersareparticularlyvulnerablewhenthereisafallinhousehold
income.Mortgagedebtisproblematicbecauseofthesizeofthedebtandthepossibility
thatfamilieswilllosetheirhomesiftheydefault.Thishaspotentialimplicationsforthe
emphasisbygovernmentonthepositiveaspectsofhome-ownership,andpoliciestosupport
socialhousingandbroadentheappealofrentingrequirefurtherinvestigation.
5 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Policyrecommendations
Inthelongterm,policymustnotlosesightoftheneedtoaddressincomeinequalityandjob
insecurity.ipprhas,forexample,previouslyarguedforactiontoincreasethesupplyofwell-
paid,goodqualityjobs,andforsupporttolow-wageworkerstostayinworkandprogress.
Immediatepolicyresponsesmustbuildfinancialstrengthandresilienceinfamiliesand
providegreatersupportforfamiliesagainstexternalshockslikejobloss.
Buildingfinancialstrengthandcreatingafairermarketforlow-incomeconsumers
•Asavingsaccounttobuildresilience –ipprproposesalife-longsavingsaccountfor
low-incomehouseholds,whichwouldbefundedbylimitingthetaxreliefonpension
contributionstothebasicrateforeveryone.Currentsavinginitiativesaimedatlow-
incomehouseholds,suchastheSavingGatewaycashaccount,aresmallscaleand
shortterm.Whenitmatures,theSavingGatewayshouldbeautomaticallytransferred
toanaccountforlow-incomesavers.Taxcreditscouldalsobepaidintothese
accounts,assuggestedbysomeofourresearchparticipants.Keepingmoneyinthe
accountandsavingshouldberewardedwith‘bonuses’.Thiswouldhelpincreaselow-
incomehouseholds’resiliencetoshocks.
•Fundingforaffordablecreditinitiativesforlow-incomefamilies –Community
DevelopmentFinanceInitiatives(CDFIs)offerafairandsustainablelendingmodel
andcanprotectlow-incomeconsumersfrommarketfluctuationsincreditsupply.The
communityfinancesectorisgrowing,butsecuringlong-termfundingforthesectoris
stillachallenge.Thisfundingshouldcomefromthebankingsector:anargumentthat
reflectswidespreaddebate(amongourresearchparticipantsandbeyond)onhow
banksshouldcontributetosocietyintheaftermathoftheeconomiccrisis.The
introductionofanAmerican-styleCommunityReinvestmentActmightencourage
bankstoinvestinlocalcommunities.TheUKbankingcontextmeanstheremayneed
tobestrongermeasurestoensuretheCityprovidesthefunds.Apercentageofevery
bank’sassetscouldbechannelledintoafundforaffordablecreditinitiatives,
administeredbyaneworganisationorthroughanexistingorganisationsuchasthe
CommunityDevelopmentFinanceAssociation.Alternatively,ifeffortstoimplementa
‘Tobintax’oninternationaltransactionsaresuccessful,someofthemoneyit
generatescouldbedivertedtoanaffordablecreditfund.
•Onlinecreditcomparison –ipprproposesaconsumer-focusedwebsitethatprovides
accessibleinformationonlocal,affordablecredit,buildingonthepopularityofprice
comparisonwebsites,whichourresearchparticipantsusedfrequentlyforother
productsandservices.
•Freeandimpartialfinancialadvice –ippr’sresearchsupportsthenationalroll-outof
theMoneyGuidanceservicecurrentlybeingpiloted,butcallsforittobroadenthe
rangeofadviceofferedandmaximiseitsimpactthrougharangeofawareness-raising
strategies.Ourresearchshowsthatthelackofimpartialadviceleadstowidespread
distrustofmanyfinancialproductsandservices.Theserviceshouldofferimpartial
mortgageadviceandpromoteawarenessofsavingsandaffordablecreditinitiatives
aimedatlow-incomehouseholds.Monitoringandevaluationofthepilotsshould
reportonhowpeoplehaveusedtheservice,aswellasonoutcomes.Theevaluation
shouldalsoseek,severalmonthson,toassessitsimpactonpeoplewhohaveused
theservice.
Dealingwithfinancialshocks:supportafterafallinhouseholdincome
•Integratedadviceandsupportatcrisispoint–thereisaneedforupfrontadvicein
theeventofsuddenjobloss.ipprhasidentifieddebtadviceandmentalhealth
supportasgapsintheknowledgeofpersonaladvisersworkingwiththeunemployed.
Thisresearchsuggeststhatpeoplewhohavelostajobmayalsobenefitfrombetter
6 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

signpostingtofamilysupportandcounsellingservices.Wereassertourprevious
recommendationforanationalaccreditationforpersonaladviserstoensurehigh
qualityandrelevantadviceandforthedevelopmentof‘specialist’adviserrolesthat
areequippedtoaddressthechallengesfacedbycustomerswhiletheyaresupported
backtowork.
•Flexibilityonfinancialcommitments –low-incomemortgage-holdersfacedwith
unemploymentareparticularlyvulnerable.AspartoftheGovernmentHomeowners
MortgageSupport,somelendersoffermortgage-holdersaffectedbyatemporaryfall
inincometheopportunitytoswaptoaninterest-onlymortgage.Lendersthathave
signeduptotheschemewillnegotiatedeferredinterestpaymentsforuptotwo
yearsforeligiblecandidates.ipprarguesthatalllendersshouldberequiredtoprovide
thisdefermentoption,whilethemortgage-holder’seffortstofindajobare
supportedthroughwelfare-to-workservices.Theinitiativeshouldbepermanentand
notsimplyacrisisresponsetotherecession.

Conclusion
Governmentpolicycurrentlyfocusesongivinghouseholdsfinancialeducationandproviding
adviceatcrisispoints.Butippr’sfindingsillustratethatdebtproblemsarerarelyaresultof
‘bad’moneymanagement.Muchofthevulnerabilitytoproblemdebtisexplainedbythe
relativeresilienceoftheindustryinwhichtheindividualworksandthetypeofcontractthey
areemployedon.Thissuggeststhat,inthelongrun,dealingwithover-indebtednessismore
dependentontheavailabilityandqualityofemploymentthanonlevelsofindividual
financialcapability.Astheeconomyisrebuilt,thereisanopportunitytoaddresstheflawsof
credit-fuelledgrowthandtoreflectonthefactthatdebthasgrownlargelyasaresultofthe
Britishdesiretoowntheirownhomes.
7 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Introduction
Thedecadeto2007wascharacterisedbystrongconsumption-ledgrowthandlow
unemployment.Relaxedmortgagetermsmadehome-ownershipattainabletoawidercross
sectionofBritishsocietythanbeforeandtheuseofcreditwasnormalisedacrossallincome
brackets.Ourgreaterwillingnesstoborrowisreflectedinadramaticincreaseinthe
proportionofhouseholddebttoincome–from93percentin1998toitspeakof161per
centin2008(seeFigure1).
Butalong-termriseinincomeinequalitywasoccurringbeneaththisveneer.Lowpayand
jobinsecurityhavepersistedinmanyindustries,andwhilemostUKdebtisownedbyhigher
earners,‘problemdebt’isassociatedwithlowincome.Thedisparitybetweenlowpay
structuresandconsumer-drivengrowthisanintegralpartofthestoryofdebtinlow-income
households.
Thisreportpresentsnewevidencefrominnovativeresearchthatipprconductedwith58
familiesin2008–9tounderstandwhatthepre-crunchexpansionofcreditmeantforthe
livesoflow-incomefamilies.Itillustratesthevulnerabilityoflow-incomefamiliestodebt,
howthosefamiliesmanagedebt,andthecircumstancesthatseedebtbecomea‘problem’.
Therehavebeennotableattemptstoimprovefinancialmanagementbyincreasingthetools
atthedisposaloflow-incomefamilies.Butpoliciesoftenfailtoaddressthereasonsbehind
debtvulnerability–whichareoftenbeyondthecontroloffamiliesindifficulty.ippr’s
researchshowshowjobinsecurityandfluctuationsinincomeandexpenditurecanexpose
poorerhouseholdstodebtproblems.Basedontheevidencepresented,wearguethatpolicy
shouldbetteraddressthefinancialinsecurityoflow-incomefamilies,strengthenfinancial
resilience,andhelpfamiliescopewiththeimpactofseverefinancialshockssuchasjobloss.

Theexpansionofcredit
Theexpansionofcreditfedconsumer-drivengrowthandthehousingboom.Atitsmost
effective,credithassatisfiedtheambitionsofmanyfamiliesandhelpedhouseholdscope
withfinancialdifficulty.Butippr’sresearchshowshowtheextraordinarygrowthofdebtasa
proportionofhouseholdincome–illustratedinFigure1–hasalsoincreasedvulnerabilityto
financialshocks.

Figure1:UK 180%
householddebt Unsecured debt to income ratio Secured debt to income ratio
160%
toincomeratio,
1993to2009 140%
Source:Datafrom
120%
BankofEngland
andOfficefor 100%
NationalStatistics
80%

60%

40%

20%

0%
De 93

De 94

De 95

De 96

De 97

De 98

De 99

De 00

De 01

De 02

De 03

De 04

De 05

De 06

De 07

De 08

09
Ju 93

Ju 94

Ju 95

Ju 96

Ju 97

Ju 98

Ju 99

Ju 00

Ju 01

Ju 02

Ju 03

Ju 04

Ju 05

Ju 06

Ju 07

Ju 08
n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-

n-
c-

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c-

c-

c-

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c-
Ju
8 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Atitspeakinmid-2007,averagehouseholddebtwasover160percentoftheaverage
income,largelyaccountedforbymortgages.InJanuary2010,averagehouseholddebtstood
at£9,016inunsecuredcreditand£57,888includingsecuredloans1 (CreditAction2010).
ThesocialprofileofBritishdebtorshasbroadened.TheRighttoBuyenabledovertwo
millionlow-incomecounciltenanthouseholdstobuytheirhome(atasubstantialdiscount
fromtheopenmarketvalue)andtherelaxationofmortgagelendingtermsfurtherincreased
accesstohome-ownershipafterthemid-1990s.Therewasariseinself-certifiedand‘No-
Income-No-Job-or-Assets’(NINJA)mortgagesforpeoplewhowouldotherwisehave
struggledtoprovetheircapacitytomakerepayments.Reflectingwideraccesstomortgages,
43percentofthelow-incomefamiliesthatparticipatedinippr’sresearchwerehome-
owners.Allbuttwoofthesefamilieshadmortgages.
Intheboomthatprecededthecurrenteconomiccrisis,consumercreditwasalsoextendedto
awidercrosssectionofsociety.Thenumberoflendersandfinancialproductsmushroomed.
Supermarketsandhighstreetstoresaswellasbanksbegantoofferunsecuredcredit.‘Sub-
prime’lendersofferedunsecuredloanswithoutacreditcheck,providingcredittopeople
withpatchyorweakcredithistories.2 Ofthelow-incomefamiliesthatparticipatedinippr’s
research,59percenthadcreditcards–just3percentlessthanthenationalaverageforthe
adultpopulationin2008(APACS2009)–and25percenthadstorecards.‘Older’formsof
credithavealsoretainedpopularity:mailordercatalogueswereusedby47percentofthe
researchparticipants.
Policiestotackledebtandfinancialdifficultyoftenfocuson‘problemdebt’–wheredebt
commitmentsexceedtheabilitytopayoverasustainedperiodoftime.Statistically,younger,
lesseducatedandpoorerpeopleareathighestriskofdebtproblems.The‘over-indebted’
includeahigherproportionofsingleparentsandfamilieswithasingleearner(Kempsonand
Atkinson2006).With22lone-parentfamiliesand17familieswithjustoneearnerinour
sample,twothirdsofourparticipantsmightbeclassifiedas‘atrisk’ofover-indebtedness.
Thereis,however,nocleardividinglinebetweentheindebtedandtheover-indebtedand
therearecomplexreasonsforwhyourdependenceondebtisproblematic.Theeasy
availabilityofcredithaschangedthetermsofvulnerability.Havingahighleveloffinancial
commitmentincreasestheriskwhenfacedwithnegativeshockstoincome.Thosemostlikely
toborrowtomakeendsmeetafteradropinincomearelow-incomehouseholdsandpeople
whoalreadyhavehighlevelsofunsecureddebtandmortgages(KempsonandAtkinson
2006).The‘democratisation’ofmortgageandconsumercreditlendingmeansthat,forthe
firsttime,wehaveenteredarecessionwithlow-incomefamiliesinconsiderabledebt.How
dothesefamiliescopeintheeventofredundancy?

Triggereventsandaspiralofdebt
Ourfindingsshowthat‘trigger’eventsarethemaincauseofdebtproblemsandarrears.
Redundancy,relationshipbreakdownandillhealthcanallresultinasudden,significantand
sustainedlossofhouseholdincomethatleavespeopleunabletomaintainfinancial
commitments.Thosewithmortgagesareparticularlyvulnerable.Whilemanyfamilieswere
previously‘coping’withhighlevelsofdebt,risingunemploymentandrepossessionhave
madedebtmorevisibleinthecurrenteconomicclimate.

1.‘Secured’referstoloansguaranteedagainstaproperty,suchasmortgagesandcarloans.‘Unsecured’
referstosourcesofcreditwithnospecificpropertyguarantee,suchascreditcardsandstorecards.
2.Theterm‘sub-prime’hasbeenpopularisedinreferencetomortgagecompaniesinparticular.Weuseit
inthispapertorefertobothmortgageandconsumercreditcompanies.
9 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Sustainedlossofincome
Overaquarteroftheresearchparticipants(15households)experiencedafallinhousehold
income,includingfivepeoplewholostajobandfourself-employedpeoplewhoseearnings
reduceddramatically,inonecaseresultinginbusinessclosure.Othershadtheirhours
reduced.Wherethelossofearningswassignificant,itresultedinasuddeninabilitytokeep
upwithhouseholdcosts,particularlyinhouseholdsreliantonasingleearner.Facedwith
reducedincomeoverasustainedperiod,anysavingswerequicklyusedupanddebtand
arrearsspiralled.
Thejobsectorandtypeofemploymentcontractcontributedtopeople’svulnerabilitytoa
fallinincome.Thisrecessionhas,asinpreviousrecessions,hitblue-collarindustriessuchas
manufacturingandconstructionthehardest,inadditiontotheretail,hospitalityandcatering
sectors(seeDolphin2009a).Theexampleintheboxbelowdescribestheimpactof
instabilityintheconstructionindustryononefamilyoffourlivinginLondon.

A38-year-oldmalefromLondonwasworkingfora
largeconstructionfirm.Hiswifewastheprimarycarer
fortheirtwoyoungchildren.Hewasonazero-hours
contract3 andworkhadbecomeincreasingly
infrequent.Hewasoccasionallyofferedcasualjobs,
buthiscontractrequiredhimtobeavailableforhis
mainemployer.
Ihaven’tgotguaranteedwork.Idon’tknowhow
manydaysI’mgetting–Iringup[myemployer]
andtheysay,“We’vegotnothingtomorrow.”Ifthey
saidtome,“Right,you’vegottwodays’workthis
week”,IcouldplanandIcouldringmymateup
andsay“I’mavailable.Ifyou’vegotextraworkI
cancomeanddothat.”SoIcan’tevenplan.That’s
thehardestthing.IfIgetafivedayweek[it’sgood
because]mydayrateisn’tbadmoney.
Beforethecurrentdownturn,thehousehold’sfinancial
historyhadbeenstable.Thecoupleboughttheir
houseatalowpriceinthemid-1990sandbenefited
fromtheriseinhouseprices.Theconstructionindustry
offeredreliableandconstantwork.Theyhadmanaged
tosavebothforspecificeventssuchasChristmasand
asaprecautionarymeasuretoprotectthehousehold
duringperiodsoflowdemandforconstructionwork.
Thecoupleneverusedanyformofunsecuredcredit.
Theydidnotwanttopayinterestandwereagainst
usingbothmainstreamandsub-primelenders.
Withincomereduceddramatically,thecouple’ssavings
wereusedupandtheyfellintoarrearsonhousehold
bills.Theirbiggestworrywasthemortgage.Rather
thanusecredit,thehouseholddrewoninformal
borrowing.Theyhadseveralgoodfriendswhowere
lendingthemmoneyfrommonthtomonthtocover
costs.Sometimesthemanwasabletopayfriends
backbycarryingoutworkontheirhomesforfree.But
withoutareliableincomethehouseholdwas
increasinglyworriedabouttheirabilitytokeepupwith
costsorpaybacktheloans.

Thisfamily’sexperienceshowshowvulnerabilitytodebtandpovertycanbelinkedtothe
ebbandflowofaparticularindustry.Itisunlikelythatbetterfinancialmanagementand
planningcouldhavechangedthesituationforthisfamily,andotherfinancialproductsmay
nothaveappealedtothem.ThisraisesthequestionofwhetherimprovementstotheUK’s
financialmanagementaddressthemainreasonsfordebtvulnerability.

Thevulnerabilityofmortgage-holders
Thecasedescribedabovealsohintsattheparticularvulnerabilityoffamilieswithsecured
loans.Arrearsorfailingtopayunsecuredcreditmayincurextrachargesandcausefinancial
difficulty.Butdefaultingonamortgagecanresultinrepossessionandhomelessness.
Approximately11,700homeswererepossessedinthethirdquarterof2009alone.This
representsa5percentincreaseonthesamequarterin2008(CouncilofMortgageLenders
2009).Whilenotnecessarilyfromthelowestincomegroupsoverall,thoseatriskof

3.Anon-legallydefinednameforanemploymentcontractthatpaysonlyforworkdoneandunder
whichtheemployerdoesnotguaranteetoprovidework.
10 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

repossessiontendtohavethelowestincomesamonghome-owninghouseholds(Shelter
2008).
In2007–8,56percentofpeopleinmortgagearrearswereinthatsituationduetoalossof
income,primarilyasaresultofunemployment,sicknessorinjury,andreductionsinpay,
hoursworked,orself-employedincome.Otherchangesthatmayresultinlossofhousehold
income,suchasthedeathofapartnerorrelationshipbreakdown,werecitedby29percent
asthecatalystformortgagearrears(DCLG2009a).Duringourresearch,fearofrepossession
wasrealformanyofthefamilieswhoownedtheirhomes,andthebiggestconcernforthose
facingredundancy.
Theywonderwhytheyarehavingtorepossesshousesandthingslike
that.Peoplecan’taffordtopayitbecause,likeourselves,theyare
goingtogetpaidoff[bemaderedundant].Wearefortunatethatwe
didhaveinsurancetopayourmortgagebutmybrother-in-lawhasn’t,
mysisterhasn’t.They’veallbeenpaidoffaswell.
38-year-oldfemale,two-parentfamily,threechildren,Glasgow

BetweenDecember2008andMarch2009,theself- Thecouplewereforcedtodefaultontwosecured
employedheadofahouseholdinNewcastle loans.Thedifferentreactionsofthetwoloan
experiencedadramaticfallinearningsasdemandfor companiesshowhowfamiliesareexposedtothe
hisbusinessplummeted.Hiswifewastheprimarycarer differingproceduresandcompassionoflenders.The
forthecouple’stwochildren.UptoNovember2008 mortgagecompanyagreedimmediatelytodefer
over75percentofhouseholdincomewasspenton January’spaymentandallowedthemtosplitthe
housingcosts,counciltax,foodandutilities(see paymentovercomingmonths.Althoughthiswas
Figure2).Otherspendingwentontelevisionand dependentonrecoveryofthebusiness,itallowedthe
telephonecosts,transportandamodestamounton coupletoplayfortime.
clothing,with11percentleftoverattheendofthe
Incontrast,thesecondcompanyrefusedtonegotiate
month.
repaymentonacarloan.Despiteadvancewarningof
InDecember2008thebusinessdidnotmakeenough thehousehold’sdifficulties,theloancompanytriedto
moneytocoverhouseholdcostsandthemantookout forcethemtopaybackmorethantheagreedamount
aloantotrytoexpandhiscustomerbase.Between andthreatenedtorepossessthecar,whichwas
DecemberandMarch2009,incomefellto essentialtothebusiness.Thecouplehadtoborrow
approximately64percentofpreviouslevels. £1,000fromafamilymembertopaythecompany,
leavingtheminconsiderabledebtwhenbusiness
Figure2:Mainexpenditureasapercentageof
finallybegantopickup.Thestressoftheexperience
income,NovembertoDecember2008–before
leftthefamilyfeelingraw.
thefamily’sfallinincome
Wewentthroughacoupleoftheworstmonths
100% we’veeverhad.Thereisnoextra,andsometimes
90% By Jan 09, Mortgage you’rehavingtorobPetertopayPaulandhoping
household
80% youmaketheextraupinbetweentogetPeter
income
had
Food paidbackagain.Thekidshavenoticed,even
70% 42%
dropped to downtopocketmoney,treats,daysout,it’sjust
60% 64% of Utilities
non-existent.It’svery,verydemoralisinggoingto
Nov 08
50% workalldayandearningnothing.It’shorrendous
income, Council tax
40% 14% while debt –itaffectsmymoods,itaffectshomelife,
30%
repayment Insurance everything.Thishastaughtusaveryvaluable
10% had payments lessoninhowquickyourlifecanbetaken–your
20% 5% increased
5% outgoings
Other incomecanbetakenfromyou[through]nofault
10%
Other 12% by 30%. ofyourown.(38-year-oldmale,two-parent
0% household,twochildren,Newcastle)
11 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Theexampleofthefamilyaboveillustrateshowtheflexibilityoflendersiscrucialto
householdabilitytomanagedebtwhenfacedwithadramaticreductioninincome.Thetight
marginsofthebudgetforthishouseholdbeforeitsfallinincomeillustratehowlow-income
familiesstruggletobuildasignificantfinancialcushiontoprotectthemfromunexpected
shocks.Moreover,whenhome-ownersareatriskofrepossession,theremaybelimitsto
whatthestateandcompaniescandobeyondgiveadviceandsupporttofindanotherjob,
andsomemeasureofflexibilityinrepaymentterms.
Thevulnerabilityoflowandmiddleincomemortgage-holdershaspotentiallywide-reaching
implications,raisingquestionsaboutaccesstomortgages.Butregulationofmortgage
lenderscouldquicklyresultinasituationwhereaspirationsforhome-ownershipcontinueto
beencouraged,butpoorerhouseholdsareexcluded.Thissuggeststhattheemphasisby
governmentonthepositiveaspectsofhome-ownershipmayneedtobereconsidered,and
policiestosupportsocialhousingandbroadentheappealofrentingrequirefurther
investigation.

Deteriorationofhealthandenduringpovertyanddebt
Inadditiontoshocksthatoccurredduringourresearch,somefamilieshadexperienceda
rapiddeteriorationofhealththatresultedindebtinthepast.Whilepeoplemaderedundant
mayhopetofindanotherjob,illhealthcanleavehouseholdsinpermanentpoverty.
Onecouplehadbothlosttheirjobsduetoillhealthinthespaceoftwoyears.Theynarrowly
avoidedhavingtheirhouserepossessedandgotintoarrearsonvariouscreditcommitments.
Fiveyearslater,themanwasstillunabletoworkandthewomanhadbeenforcedtotakeon
variouspart-timeandself-employedrolestomakeendsmeet.
Ilostmyjobandmyhusbanddidaswell.Thatjustkilledmyfinances
completelybecausewehadnearly£40,000ayearcominginandwe
wentfromthattonothing.Iwasgetting£60aweekonincapacity
[benefit].Hewasgettingabout£80.
46-year-oldfemale,two-parenthousehold,twochildren,Newcastle
Ahistoryofdebtandongoinglowincomemeantfamilieslikethiswerealsotheonesmost
likelytofacecreditrestrictions.Inonefamily,themainwageearnerhadanaccidentatwork
thatresultedinpermanentdisability.Beforetheaccident,thecouplehadbothworked.They
hadsavingsandinvestmentsbutthesewerelostwhenthehouseholdbecamedependenton
asingleearner.Thecouplewerestillpayingoffdebtstwoyearsaftertheeventandhad
limitedaccesstocredit.
Ihavebeendisabledsince2007.IhadafallandI’vehadoperations
onmybackandthereisnothingtheycando.[Mywife]savedupfor
yearswithsharesandallthatandthatwassupposedtobeforus,and
wejusthadtouseittospendonthemortgageandthatandjust
basicallyliving.We’vegotnothing.Wehadbeensavingthroughthe
badtimeswhenthekidswereyoungandit’s[a]bloodywaste,all
becauseIcan’twork.Icouldn’tgetacreditcardnowbecauseI’m
disabled.IowesomemoneyonacreditcardandI’vegottopayitoff
butI’vegotanarrangement.Ionlypayacoupleofquid.It’sstilla
nooseroundyourneck,isn’tit?
42-year-oldmale,two-parenthousehold,twochildren,Newcastle
Inbothoftheabovetwocases,illhealthanddisabilityleftonepartnercaringforthe
other.Theongoingfinancialimpactofcaringcanbesignificant.Reflectingthe
prevalenceofcarersandthedisabledamonglow-incomehouseholdsandbenefit
claimantsintheUK,16ofthehouseholdsinourstudy(or26percent)included
someonewithadisabilityorchronicillness.AccordingtoresearchconductedbyCarers
UK(2008),almostathirdofcarersthatpayrentoramortgagestruggletomeetthe
12 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

cost,threeoutoffourcarersstruggletopaytheirutilitybillsasaresultofcaringand
overhalfcutbackonfoodtomakeendsmeet.

Thedailyrealities:consumerspendinganddebtona
shoestring
Allincomegroupscanexperiencea‘shock’totheirincome.Butippr’sfindingsillustratehow
povertyandfinancialinsecuritymeanlow-incomefamiliesarealreadyvulnerabletodebt.As
someofthecasestudiesabovesuggest,low-incomefamiliesmayfindithardertosaveasa
precautionarymeasurethanthosewithahigherincome,leavingthemmorevulnerableto
shocks(seealsoDolphin2009b).
Theliteraturesuggeststhatpoorerhouseholdsaremoreacutelyawareofinflowsand
outflows,andlow-incomefamiliestendtodobetterthanwealthierfamiliesatbudgeting
(FinancialServicesAuthority2006).Regardlessoffinancialmanagementskills,however,
manystruggleonalowincome(seeRowlingsonandMcKay2008).Thissectionshowshow
resourcesarestretchedtothelimitbypredictableandunpredictablefluctuationsinincome
andexpenditure.

Financialinsecurityanddebtvulnerability
Ourfindingsshowthatlowqualityemploymentincreasesvulnerabilitytocyclesofdebt.ippr
highlightedtheproblemofhighlevelsoflowpayandin-workpovertyintheUKinearly
2008(CookeandLawton2008).Furtherquantitativeresearchdemonstratedthereisa
persistentlackofsecurejobsinlow-payingsectorssuchassecurity,catering,childcareand
retail,whichmeansworkersintheseindustriesoftenfindthemselvesinacyclebetween
workandbenefits(Lawton2009).
Householdcostsmountupduringtransitionperiodsbetweenworkandunemployment.One
ofourresearchparticipants,asinglemotherinNottingham,hadfoundajobthatpaid
relativelywell.Butitonlylastedforamonth,threetimesayear.Thegapsinpaywhileshe
waitedtoreceivebackdatedwagesandbenefitpaymentshadresultedinconsiderabledebt.
Shewasinarrearsonallhouseholdbillsandowedmoneytofamilyandfriends.Ontopof
hercurrentelectricityusage,shewaspayingoffherelectricityarrearsthroughameter.She
wassufferingfromdepressionandsaidshefeltlikeshewasalways‘playingcatch-up’ina
viciouscircleofdebt.
Ican’tgetapermanentjob.Ilookeveryday–there’snothing.I’vehad
thebailiffshereformycounciltax.IfeellikeI’mgoingtocry.It’smy
fault–whenI’matworkIshouldpaycounciltaxandtherestofthe
timeI’mnotpayingit.Ijustgotinacompletemesswithitall.The
[electricitycompany]haveputmeanelectricitymeterinandit’sjust
ridiculous.I’mspendingsomuchonitbecauseitisn’tjusttakingthe
electricitythatIuse.It’stakingoffthedebt.
47-year-oldfemale,one-parenthousehold,onechild,Nottingham
Short-termboutsofphysicalillnessordepressionalsoleftsomepeoplevulnerabletobeing
caughtincyclesofbeinginandthenoutofwork.ippr’sresearchonin-workpoverty
suggestedthatretainingworkmaybedifficultforpeoplewithcaringresponsibilitiesorthose
withadisabilityorhealthcondition(Lawton2009).
Ourresearchshowsthatthequalityandtermsofemploymentplayaroleinhowexposed
thesehouseholdsaretofinancialdifficulty.Illhealthwasparticularlyproblematicforpeople
ontemporarycontractsandthosecontractedasself-employed–amongourresearch
participants,thisincludedbuilders,andlorryandtaxidrivers.Theywerenotentitledtosick
13 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

leavesotakingtimeoffresultedinlostincome.Thesehouseholdssometimesslippedinto
arrearsandhadtoborrowtomeetfinancialcommitments.Thethreatofanotherboutof
illnesscausedongoingstress.
Itwasdreadfulbecausemyhusbandhadbeenoffworkforthreemonths
becausehehadanoperationonhisshoulder.Heonlygotpaidoneof
themonthssoIhadtodotwomonthswithouthispay.ThesavingsthatI
hadinthebankwereusedtoliveonsothistookthesavingsdownto
nothing.ThenthecarwentsoIhadtoborrowitoffmymum.
32-year-oldfemale,two-parenthousehold,threechildren,Newcastle
Therewasacleardifferencebetweenfamiliesdependentonwageswhichwerelowand
unstableandthoseinlong-termreceiptofstatebenefits.Unemployedhouseholdsreceiving
benefitswereamongthepoorestfamiliesandrepresentedthree-quartersofthoseliving
belowthepovertyline(calculatedbeforehousingcosts;seeAppendix).Butthesefamilies
hadasteady–ifsmall–income.Whenaskedabouttheimpactoftheeconomiccrisis,their
biggestconcernwasnotjoblosses,buttheriseinthecostoffoodandfuel.Housingbenefit
offeredastabilitymanyworkingfamiliesdidnothave.
I’msecureanywaybecauseit’sacouncilhouseattheendoftheday.I
haven’tgottheworrylikeapersonpayinghismortgagewhocould
losetheirjobtomorrow.He’sgotmoreworriesthanI’lleverhavein
thatrespect.
47-year-oldmale,two-parenthousehold,threechildren,Nottingham
Incontrast,thecostofhousingiscrucialtounderstandingdebtvulnerabilityamongworking
families.Overhalfthefamilieslivingbelowthepovertyline,asmeasuredafteraccountingfor
housingcosts,wereinwork.Ofthosepayinghousingcosts(33families),almostathirdspent
morethan30percentoftheirincomeonhousing.Inaperiodofexceptionallylowinterest
rates,mortgage-holderswerespendingonaverage27.4percentonhousingcostsasa
proportionoftheirincome–6percentmorethantheaveragepaidbythetenantsinthe
sample.

Fluctuationsinexpenditure
Allhouseholdsexperiencefluctuationsinexpenditure.Butrisingcostshavea
disproportionateimpactonlow-incomefamilieswho,bydefinition,manageextremelytight
budgets.Ourfindingsillustratehowfinancesarestrainedbyeverydaymalfunctions–a
brokenwashingmachine,aleakypipe,anunexpectedlyhighbill,oranannualpaymentfor
whichfamilieshavenotmanagedtosave.
I’vejustrepaidallmycreditcardsoff,whichwasgreat–acleanslate
sortofthing–butthenthecarinsurance,thatwas£350andthe
telephonebillwasreallyexpensive,thatwas£150.Icansee[thedebt]
startingtocreepupsoitdoesworryme.Bythistimenextyearifwe
haven’tincreasedourincomewe’regoingtobebacktosquareone
again.
47-year-oldfemale,two-parenthousehold,threechildren,London
Oneofthereasonscitedfornotsavingwasthatreserveswerealwaysusedupbyunforeseen
costswhensomethingbrokedown.Theefforthardlyseemedworthit,somepeoplesaid,
becausetherewasnorelieforrewardattheend.
Inadditiontotheunexpected,therewerepredictableseasonalandoccasionalfluctuationsin
expenditure.Schoolholidays,Christmasandbirthdaysareexpensive.Presentsforchildren
werethehighestsinglecostatChristmas.Someparentsarguedthatapresentcanprovide
year-roundentertainmentfortheirchildrenandcompensateforalackofregularfamily
activitiesintherestoftheyear.Manysaidtheywouldfeelguiltydenyingtheirchildrenat
Christmas.
14 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Especiallywiththekidsattheirage,theylove[Christmas]–justseeing
theirfaces–soyoufindthemoneyforit.Obviouslylastyearwasn’ta
problembecauseIwasearningwell.Thisyearisgoingtobedifferent.
Theydon’tunderstandhowbad[ourfinancialsituation]is,andthey
areinnocenttoo,soyoudon’twanttotellthem.It’sallaboutyour
childrenatChristmas,soyougivethemagoodChristmasandyou
worryaboutitafterwards.
38-year-oldmale,two-parenthousehold,twochildren,London
Intherun-uptoChristmas,expenditureexceededincomeformorefamiliesthanduringany
othermonthsovertheproject.Figure3showshowonefamilywasspendinginNovember
andDecember.SeveralbirthdayscoincidedwithChristmasandtogethertheserepresented
thelargestexpenditure,at29percentofmonthlyhouseholdincome.Intotal,theyspent
106percentoftheirmonthlyhouseholdincome.InJanuary,thehouseholdspentwithin
budget,buthadreducedtheirconsumptiontomeetdebtrepayments.

Figure3:Main
expenditureasa Christmas and
percentageof 120% birthday presents
income, Food
November– 100%
December2008, 29%
Car (incl. repair)
fortwo-parent 80%
familywithfour 19% Rent
children(two 60%
ofthem 15%
Entertainment
dependent), 40% 8%
Newcastle 7%
5% Debt repayment
20%
Other - 24%
Other
0%

Christmaswasthemostcommonreasonfamiliessaved,butmanystillstartedthenewyear
withanewdebtcycleandJanuaryandFebruaryweretypicallyausteremonths.Most
householdspredicteditwouldtakethreetofourmonthstorecoverfromthecost.For
severalfamilies,itwouldtakeuptoeightmonthsforspendingtogetbacktonormal.

Choices,attitudesandthe‘sub-prime’problem
Thefindingspresentedherehavemadethecasethatfinancialdifficultyisnotalways–or
evenoften–aresultof‘bad’financialmanagement.However,attitudesandabilitiesdo
informthewayfamiliescope.Therewerewidevariationsamongthefamiliesarounduseof
credit.Patternsofdebtweredependentonacombinationofavailableresources,the
suitabilityofdifferentfinancialproducts,andattitudestofinancialmanagement.
Manyexpressednegativeattitudestowardscredit.Peoplewerecompletelyawareofthe
interestratestheypaidandmanypreferredtoborrowinformallyfromfamilyorfriends.Some
householdsdeployedarrearsstrategically,postponingbillsthatdidnotincurchargesto
jugglepaymentsovercostlytimesoftheyear.Asignificantminorityactivelychosenotto
usecredit.Whenaskediftheyeverborrowedorusedcredit,severalfamiliessaidtheyhad
madeadecisiontoalwayspayforthingsupfront.
15 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Wenevergetintodebt.That’sonethingthatwe’vealwayssaidwe’ll
neverdo.
21-year-oldfemale,two-parentfamily,onechild,London
Ipersonallydon’tliketogetintodebt.IfIcan’tafforditIsaveupsoI
canbuyorsaytomymumormydad–mydadwillgetmeitandthen
Igivehimthemoney.Idon’tbelieveinpayingtheinterest.
45-year-oldfemale,one-parenthousehold,twochildren,Glasgow
Inadditiontothosewhochosenottousecredit,somefamilieshadlimitedaccessto
mainstreamlenders.Thecreditmarkethascontracted.Thegrowthratesofunsecuredand
securedlendingnosedivedafterthecrisisbegantounravelinOctober2007.Whilemortgage
lendershavemadeatentativeefforttobeginlendingagain,unsecuredcreditlending
continuestofall(BankofEngland2009).Familiesfounditincreasinglydifficulttoaccess
unsecuredcreditoverthecourseofourresearchandpeoplewithfixedratemortgagesthat
weredueforrenewalwerestrugglingtofindadeal.
Whenthetermsofstandardcreditconstrict,peoplemayturntoanalternativecreditmarket.
Somecompanies–inthe‘sub-prime’market–provideloansatexpensiveratestopeople
whodonotmeettherequirementsofmainstreamlenders.Butourresearchshowsthatthe
choiceoflenderalsoreflectspeople’scircumstancesinrationalways.Marketoperators
directedatlow-incomehouseholds,suchasdoorsteplenders,offerflexibleterms.Weekly
paymentplansallowpoorerconsumerstobuygoodstheycouldnototherwiseafford,andto
payinawaycompatiblewithweeklybudgeting.Althoughpeopleknewthattheypaidover
theoddsforthissortofcredit,financialinsecuritymeantflexiblerepaymentoptionswere
easiertomanagethanfixedmonthlypayments.
IfIhaveacrisisIwouldthengoto[thedoorsteplenders].Iknowyou
paythreetimesasmuchtopayitbackbutifyou’vegotaproblem
theynormallyhelpyouout.Theycometothedooreachweekandif
youhaven’tgot[the]£10theywant,it’squiteeasytogive£5or
whatever.They’remybackbone.
46-year-oldfemale,two-parenthousehold,threechildren,Nottingham
Researchinthelate1990sshowedthatwhile‘extortionate’lendersareusedbyrelativelyfew
people,companiesmaytargethighpressuresalestechniquesatpeopleinfinancialdifficulty,
andfindloopholesinlegislationthatprohibitscanvassingcreditonpeople’sdoorsteps
(KempsonandWhyley1999).Onlyfourhouseholdsinourresearch(7percentofthetotal)
drewondoorsteplenders,buttheexperiencesofmanyfamiliessuggestthatsuchpractices
stilltakeplace.
Severalresearchparticipantssaidthatitwasnotuncommonforthesamesalespersontovisit
housesregularly,bothtosellcreditandcollectrepayments,andtheywereoftenafamiliar
and‘friendly’faceintheneighbourhood.Conversationsaboutcreditanddebtfrequently
turnedtotheaggressivemarketingofcreditcompanies.Peoplesuggestedthishad
intensifiedoverthepastdecade,althoughsomesaidithadtailedoffsincetheeconomic
crisis.
Overtheyearswe’vehadloansoffafewdifferentpeople,andIused
togetphonecallseveryotherweekoffthesepeople,youknow:“CanI
offeryousomething?”Iwentabitmentallastyear–peopleoffering
memoneyoverthephone.Youstillgetletterscomingthroughthe
door.
34-year-oldfemale,two-parenthousehold,threechildren,Glasgow
Relianceonthissortofcreditcanleadtoproblems.OnewomaninGlasgowhadbeen
offereda£5,000loandespitebeingunemployed.Shetookitandherdebtquicklyspiralled.
Sheeventuallyhadtodeclareherselfbankrupt.
16 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Ididn’thaveapoundinthebankandtheyofferedmea£5,000loan,
whichItook.AfterafewmonthsIcouldn’tmeetthepayments,thenI
hadthecatalogueandthenIwasofferedaVisaanditjustspiralled
outofcontrol.IknowitwasalotofmyownfaultbecauseIwastaking
it.Ihadmykids[and]theywereneedingmoreandmore.SoIthink
[thecompany]shouldreallyhavetakenmorecontrolwhenIhadno
incomebeforeallowingmetogetloans.
44-year-oldfemale,two-parenthousehold,twochildren,Glasgow
Thequotefromthiswomandrawsattentiontotimelessdebatesaboutwhethersocialpolicy
shouldbetargetedatthemarketortheconsumer,andhowpaternalistinterventionsshould
be.Itiseasytomakemoraljudgementsonthe‘bad’financialdecisionsthatpeopletake
acrossallincomegroups.Equally,marketingstrategiesthattargetpeopleunlikelytobeable
torepaycreditarerepulsivetomany.Forthefamilieswespoketo,suchexperiences
epitomisedtheperceivedirresponsibilitythatcausedthecurrenteconomiccrisis.
ForyearsIhavebeensayinghoweasyitistogetcredit,because
peoplewhoarereallypoorshouldn’treallybegettingcreditandevery
corneryougointothere’spawnshopsorcreditshopsthatcangiveyou
yourcashorchequeandthatissotemptingforpeople.Itwas
irresponsibleforthepeopletakingupthecredittheycouldnotafford
butitwasmoreirresponsibleforthepeopleofferingittopeople.
47-year-oldfemale,two-parenthousehold,threechildren,Glasgow
Butinterventionstoclampdownoncreditinvariablyaffectthosewithlowandinsecure
incomes.Theextensionofcreditandmortgageswasbornoutofrecognitionthatthere
cannotbeonesetofrulesforpoorpeopleandanotherforeveryoneelse.Oneoptionisto
combinemarketregulationswithfaireralternativestoconsumercredit.
‘Local’financialinstitutionsofferingcredit,suchascreditunions,wereingeneraltrusted
morethanlargebanksandcompaniesbyourresearchparticipants.TheGlaswegianwoman
bankruptedbyeasyloanshighlightedaScottishscheme,Scotcash,whichisofferingan
alternativetodoorsteplendersindeprivedareas.Scotcashprovidesaffordableloanswith
flexiblerepaymenttermsbasedonpeople’scurrentincomeratherthantheirpastcredit
history.
MostpeopleIknowusedoorsteplenders.Idon’tusethemanymore
becausethey’retooexpensive.IuseScotcash.They’llseehowmuch
you’vegotcomingin,soifyou’vegot£200aweekthey’llonlylend
youenough.Theywon’tgiveyouanymore.It’sjustupandrunning
aboutayearandahalfbutit’sdoinggreat,andit’sstopping[the
doorsteplenders]fromcomingtoyourdoor.EverydayexceptSunday
yougetdoorsteplenderson[thehousingestate].
44-year-oldfemale,two-parenthousehold,twochildren,Glasgow
Thetensionsbetweentheutilityofcreditandtheirresponsibilityassociatedwithdebtwere
themesthatemergedthroughoutourresearch.Thesetensionsalsorunthroughpolicy
responsestoproblemdebt.Pre-crisispoliciessettledonfinancialeducationandadvice,
whichregulateneithertheconsumernorthemarketandwerecriticisedforbeingill-targeted
andmisconceived(seeErturketal2005).TheroleofcreditandlendingintheUKeconomy
isthesubjectofongoingdebate.Ourrecommendationsareaimedathouseholdlevel.They
reflecttheevidencepresentedonthevulnerabilityoflow-incomefamiliestofinancial
insecurityanddebt.
17 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Policyrecommendations
Inthelongterm,policymustnotlosesightoftheneedtoaddresstheincomeinequalityand
jobinsecuritythatsitattherootofmuchproblemdebt.ipprhas,forexample,previously
arguedforactiontoincreasethesupplyofwell-paid,goodqualityjobsandtosupportlow
wageworkerstostayinworkandprogress(Lawton2009).
Immediatepolicyresponsesmustbuildfinancialstrengthandresilienceinfamilies,createa
fairermarketforlow-incomeconsumers,andprovidegreatersupportforfamiliesagainst
externalshocks,likejobloss.

Buildingfinancialstrengthandcreatingafairermarketforconsumers
Asavingsaccounttobuildresilience
Wherepossible,itisbettertosavethantoborrow.Facedwithminorshocksandseasonal
fluctuationsinexpenditure,savingallowsfamiliestoavoid–oftenextremelyhigh–interest
payments.ippr’sresearchshowsthedifficultiesthatlow-incomefamiliesfacewhentryingto
saveasaprecautionarymeasure(Dolphin2009b).
Currentsavinginitiativesaimedatlow-incomehouseholdsarelimitedinthestageoflifethey
targetandtheirscale.TheSavingGatewaypilotsshowthesuccessofmatchedsavings
schemesforlow-incomehouseholds,buttheylastjusttwoyearswithmaximumsavingsof
£900.ChildTrustFundsareuniversalandofferextrapaymentsforchildreninlow-income
households.Butthereisnoincentivetostoppeoplespendingthemoneyallatoncewhen
theyreach18.
Inanearlierreportfromthisresearch,ipprproposedalife-longsavingsaccountforlow-
incomehouseholds,fundedbylimitingthetaxreliefonpensioncontributionstothebasic
rateforeveryone(seeDolphin2009bforafulldiscussion).Theaccountshouldbesimple
andprovideincentivestosave.Wesuggest‘bonuses’torewardpeopleforkeepingmoneyin
theaccountandsomematchedcontributions.ChildTrustFundsandmoneysavedthrough
theSavingGatewayschemeshouldbeautomaticallytransferredtoalife-longaccountfor
low-incomesaversastheymature.Taxcreditscouldalsobepaidintotheseaccounts(as
suggestedbyoneofourresearchparticipants).
Fairandsustainablecredit
Mostfamilieswillattimesneedtoaccesscredit.Wherecreditconditionstighten,itis
inevitablythosewithlowerandlessstableincomesthatareexcluded.Ideally,these
householdsshouldhaveaccesstofairandaffordablecreditratherthantocompanies
chargingexpensiverates.Ourresearchalsoshowsthattrustandlocalityareimportantto
peopleandinfluencehowtheysaveandfromwheretheyborrow.
WearguethatCommunityDevelopmentFinanceInstitutions(CDFIs)suchascreditunions
offerafairandsustainablelendingmodelandcanprotectlow-incomeconsumersfrom
marketfluctuationsincreditsupplytoavoidrelianceonhigh-interestlenders.Locally-based
andnon-profit,cooperativelendinginitiativeslendataffordableratesonthebasisofcurrent
incomeandsavingshistoryratherthancredithistory.
Thecommunityfinancesectorisgrowing,butsecuringlong-termfundingforthesectoris
stillachallenge.Reflectingwidespreaddebate–amongourresearchparticipantsand
beyond–onhowbanksshouldcontributetosocietyintheaftermathoftheeconomiccrisis,
ipprarguesthatfundingforaffordablecreditinitiativesforlow-incomefamiliesshouldcome
fromthebankingsector.
TherehavebeencallsfromtheSocialInvestmentTaskforce(2005)andtheNewEconomics
Foundation(2009)tointroduceaCommunityReinvestmentActintheUK.BasedontheUS
model,theactpromotestransparencyinthebankingsystem.Banksthatdonotinvestin
18 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

localcommunitiescanbeforcedtosupportanaffordablelender.TheUS,however,hasmany
moresmall,localbanks.ThefactthatintheUKwearedependentonasmallernumberof
muchlargerbanksmeanstheremayneedtobestrongermeasurestoencouragebanksto
provideservicesforlow-incomefamilies.Apercentageofeverybank’sprofitscouldbe
channelledintoafundforaffordablecreditinitiatives,administeredbyaneworganisationor
throughanexistingbodysuchastheCommunityDevelopmentFinanceAssociation.
Alternatively,ifeffortstoimplementa‘Tobintax’oninternationaltransactionsaresuccessful,
someofthemoneyitgeneratescouldbedivertedtoanaffordablecreditfund.
Lowawarenessremainsabarriertouptakeofmanysavingsandaffordablecreditinitiatives
aimedatlow-incomehouseholds.ipprproposesthatlocalauthorities,membershipbodies
suchastheAssociationofBritishCreditUnionsLtdandtheCommunityDevelopment
FinanceAssociationcoulddevelopawebsitetoprovideaccessibleinformationforconsumers
tocompareaffordablecreditintheirarea.Thesetypesofpricecomparisonwebsiteswere
frequentlyusedbyourresearchparticipantsforotherproductsandservices.
Freeandimpartialfinancialadvice
Currently,fundingforfinancialadviceisfocusedatcrisispoints.Thereisstillnowayfor
peopletoaccessimpartialadviceandinformationonfinancialproductsandservices.This
wasreflectedinwidespreadsuspicionaboutseekingfinancialadviceamongourresearch
participants.
TheGovernmentandtheFinancialServicesAuthorityarecurrentlypilotinganimpartial
moneyguidanceserviceintheNorthofEngland(FSA2009).Ourresearchsupportsthe
needforthenationalrolloutofthescheme,whichisdeliveredthroughexistingadvisory
servicessuchastheCitizensAdviceBureau.Wealsocallfortheservicetobemoreambitious
tobroadentherangeofadviceitoffersandmaximiseimpactthrougharangeofawareness-
raisingstrategies.Weproposethecurrentfocusonbudgeting,planningand‘jargon-busting’
shouldbeaccompaniedbyimpartialadviceonfinancialproducts,includingsavingsand
affordablecreditinitiativesaimedatlow-incomehouseholds,andmortgages.Itisvitalthat
advicefocusesnotonlyonthe‘best’mortgagedeal,butalsoonwhetherornottakingona
mortgageisworththerisk.
Monitoringandevaluationofthepilotsshouldreportonhowpeoplehaveusedtheservice
aswellasoutcomes.Theevaluationshouldfollowupwithpeoplewhohaveusedtheservice
severalmonthsontounderstandandassessitsimpact.

Dealingwithfinancialshocks:supportafterafallinhouseholdincome
Integratedadviceandsupportatcrisispoint
ippr’sresearchhasshownthedramaticimpactofjobloss,highlightingtheneedforupfront
adviceonwhatstepstotakebeforefamilieshitcrisispoint.Previousresearchbyipprhas
identifieddebtadviceandmentalhealthsupportasgapsintheknowledgeofpersonal
advisersinJobcentrePlusandprivateandvoluntarywelfare-to-workproviders.Thisresearch
suggeststhatpeoplewhohavelostajobmayalsobenefitfrombeingsignpostedtofamily
supportandcounsellingservices.ipprhasrecommendedanationalaccreditationforadvisers
workingwiththeunemployedtoensurehighquality,relevantadviceandstrongcustomer
service.Wehavealsoarguedforthedevelopmentof‘specialist’adviserrolesthatare
equippedtoaddressthechallengesfacedbycustomerswhilebeingsupportedbackinto
work(McNeil2009).
Flexibilityonfinancialcommitments
Ourresearchhashighlightedthevulnerabilityoflow-incomemortgage-holdersfacedwitha
dropinincome.Repossessionmustbealastresort,andathouseholdlevelwhatmatters
whenfacedwithasuddenlossofincomeisflexibility.AspartoftheGovernment
HomeownersMortgageSupport(DCLG2009b),somelendersoffermortgage-holders
19 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

affectedbyatemporaryfallinincometheopportunitytoswaptoaninterest-onlymortgage.
Lendersthathavesigneduptotheschemewillnegotiatedeferredinterestpaymentsforup
totwoyears.
ipprarguesthatalllendersshouldberequiredtoprovideadefermentoptionwhileeffortsto
findajobaresupportedthroughwelfare-to-workservices.Whilethescaleofcurrentjob
lossesmakessuchmeasuresurgent,peopleexperiencelossofincomeduringperiodsof
economiccalmtoo.Wethereforearguethatthisshouldbeapermanentrequirementof
lendersandnotsimplyacrisisresponsetotherecession.

Conclusion
Debatesarounddebtandaccesstocreditareriddledwithinconsistenciesandcontradictions.
Theexpansionofcredithasbeenunderpinnedbysocialjusticeargumentsforthe
democratisationofcreditandtherightsoflow-incomefamiliestoowntheirownhomes.At
thesametime,problemdebtisoftentakenasasignoffinancialmismanagement,andmuch
policytimehasbeendevotedtoencouragingbehaviourchange.Financialcapabilityisnow
ontheNationalCurriculumforsecondaryschoolpupilsandbudgetingskillsaresoontobe
introducedtochildrenasyoungasfive.
Theevidencefromthisresearchshowswhylow-incomehouseholdsaremostvulnerableto
debtproblems.Whilenotalllow-incomefamiliesusecreditorgetintodebt,lowpay,job
insecurityandfluctuationsinexpenditurecauseconsiderablestrainandmakeitdifficultto
planahead.Financialtoolsareusefulindealingwithfinancialinsecurity.Butwideraccessto
creditisnotaproxyforaddressingpoverty.
Themaincauseofproblemdebtandarrears,eveninaperiodofeconomiccalm,islossof
householdincome.Therateofjoblosscanincreaseandmiddleincomehouseholdsplunge
furtherintopovertyanddebt.Thissuggeststhat,inthelongrun,preventingproblemdebtis
moredependentontheavailabilityandqualityofemploymentthanonbuildingindividual
financialcapability.
Thecurrenteconomiccrisishascastasharplightonbroadculturaltrendsacrossallincome
groups.Consumer-ledaspirationsandanationalobsessionwithhome-ownershiparedeep-
seatedculturaldevelopmentswithbothsocialandeconomicdrivers.Butformanyfamilies,
accessreliesheavilyondebt.Astheeconomyisrebuilt,itpresentsanopportunitytoaddress
theflawsofcredit-fuelledgrowthandtoreflectonhowdebthasgrown,largelyasaresultof
theBritishdesiretoownourownhomes.
20 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

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CookeGandLawtonK(2008)WorkingOutofPoverty:Astudyofthelow-paidandthe‘working
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CouncilofMortgageLenders(2009)‘CMLcuts2009repossessionforecastto48,000’,pressrelease,
12November,www.cml.org.uk/cml/media/press/2456
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http://research.dwp.gov.uk/asd/hbai_arc.asp
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DolphinT(2009b)SavingandAssetBuildinginLowIncomeHouseholds London:ippr,
www.ippr.org.uk/publicationsandreports/publication.asp?id=722
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21 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

Appendix:Researchmethodologyandprofileofthe
sample
ippr’squalitativeresearchtookplaceoverfourmonthsin2008and2009,with58low-
incomefamiliesinLondon,NewcastleuponTyne,NottinghamandGlasgow.Theresearch
exploredpeople’sexperiencesanddecisionsthataffectfinancialmanagement,including
attitudestowardscreditanddebt.Alongitudinalmethodologyallowedustolookbeyonda
particularsnapshotintime,asfollows:
•Face-to-face,in-depthinterviewswereconductedinDecember2008andJanuary
2009.
•Familieswerethenaskedtocompleteaweeklydiaryforamonth,whichprovided
detaileddataonhouseholdincomeandexpenditure.
•BetweenFebruaryandMay2009,researchersconductedshorttelephoneinterviews
everytwoweekstomonitorchangestoincomeandexpenditure.
•Finalin-depthinterviewstookplaceinAprilandMay2009with52families(six
familiesdidnotcompletetheresearch).
Participantswereselectedtoreflectarangeofhouseholdsizesandcomposition,ethnicity,
caringresponsibilities,home-ownership,benefitentitlementandemploymentstatus,as
follows:
•Outofthe58familiesinterviewed,34weretwo-parenthouseholds,22wereheaded
byloneparents,andtwofamilieswerelivingwithfamilyorfriends.
•Thefamilieshadbetweenoneandfivechildrenbelowworkingage.
•77percentoftheparticipantswhoself-selectedthemselvestoanswerthequestions
onfamilyfinanceswerefemale(45households).
•Theageoftheparticipantsrangedfrom21to50yearsold.14respondents(24per
centofthesample)wereagedbetween21and30;19(33percent)wereaged31to
40;and25(43percent)wereaged41to50.
•50householdswerewhiteBritish,fourwereBritishAsian,twoweremixedrace(West
Indian/WhiteBritish)andanothertwowerenon-UK-nationals.
•16ofthehouseholds(28percent)includedsomeonewithadisability.
•22households(16ofthemcouples)hadmortgages,andtwosinglemothersandone
coupleownedtheirhousesoutright.Ofthe33tenants,15hadtheirrentpaidby
housingbenefits(11ofthemsinglemothers).
FigureA1showstheemploymentstatusofthehouseholdsatthestartofthestudy.More
thanhalfofthefamiliesweresingle-earnerhouseholdsandineightofthe10familieswith
twoworkingadults,oneorbothworkedparttime.
Weappliedabroaddefinitionof‘lowincome’tocapturethediversityofexperiencesamong
low-incomefamilies.FiguresA2andA3showthefamilies’equivalisedhouseholdincome5
againsttheUKmedianincomeandthepovertyline,beforeandafterhousingcosts.
•Overthree-quartersofthesamplehadbelowaverageincome,andaboutaquarterof
familieswerelivingbeloworonthepovertyline.

5.ThedatawasequivalisedusingtheMcClementsEquivalenceScale.Povertylineandmedianincomeon
2007/8,levelsalsousingtheMcClementsscale,arefromtheHouseholdsBelowAverageIncome
(DepartmentforWorkandPensions2009).Thedataforsevenhouseholdswasincompleteandis
thereforenotincludedinFiguresA2andA3.
22 ippr|StrengthAgainstShocks:Low-incomefamiliesanddebt

•TheremainingfamiliesearnedalittleovertheUKmedianincome,andtwofamilies
hadcomparativelyhighratiosofincometothenumberofpeopleinthehousehold.
•Formorethantwo-thirdsofallhouseholds,benefitsandtaxcreditscomprisedover30
percentoftotalincome.

FigureA1: 3%
Employment 17%

statusatthe 29%
startofproject

51%

Two working adults Single earner household

No working adults Extended household

FigureA2:
E qu iva lise d w e e kly in co m e B H C
Household £1,400
P o ve rty lin e B H C
weeklyincome
M e d ia n in co m e B H C
beforehousing £1,200
costs
£1,000

£800

£600

£400

£200

£0

FigureA3: E qu ivaEquivalised
lise d w e e weekly
kly in coincome
m e B HAHC
C
Household £900
P o ve rty lin e Bincome
Median H C AHC
weeklyincome M e d iaPoverty
n in co mline
e BAHC
HC
£800
afterhousing
costs £700

£600

£500

£400

£300

£200

£100

£0