Debt warning: Government urged to change as COVID-19 forces families to a ‘tipping point’

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Debt problems have been mounting in recent months as the economic impact of coronavirus continues to weigh on family finances. Unfortunately, this problem is hitting those on a low income the hardest,

According to IPPRs findings, of the poorest 10 percent of households (by income) in the UK:

  • Around 61 percent have financial debt, compared to 33 percent for the highest 10 percent of earners
  • Around 35 percent have debts worth more than the total of their assets
  • Around 25 percent of people spend more than a quarter of their income on servicing debts or are in arrears, compared to just six percent of the highest 10 percent of earners
  • Around 13 percent have debt repayments greater than 20 percent of their household income

While the report acknowledged the long-term impact of coronavirus on the household debt remains unclear, it went on to examine what is known so far.

As the report detailed: “Citizens Advice estimate six million people have fallen behind on a household bill due to covid-19.

“In addition, 3.9 million people have fallen behind on their credit card repayments or overdraft.

“Mobile phone and broadband bills are the most common areas of arrears, perhaps because they are seen as a relative ‘inessential’.

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“But 2.8 million people are behind on energy bills, the same number on council tax, and 1.2 million people are in rent arrears.”

Additionally, it was revealed one in seven people went from “just about managing” into debt problems as coronavirus emerged.

Fortunately, John Pears, the UK Managing Director at Lowell, provided advice on how people can address and manage their debt: “Engaging with debt is the first hurdle and letting it pile up can have a hugely detrimental effect on people’s mental health.

“Getting the right support is vital if people start falling into arrears to make sure debt doesn’t become a problem.

“This report shows that more people than ever are reaching that tipping point and we have to make sure they seek help and can recover properly, not just get cast aside.

“At Lowell, people can access all sorts of support for their debt with us, getting payment holidays, long term repayment plans or StepChange’s new Covid Payment Plan, all without fees or interest.

“It is important to us that, now and in the future, we get people back on their feet and financially healthy and stable.

“We want to ensure that everyone in debt is accessing that flexibility and care, so people need to take the first step and reach out if they are struggling.”

IPPR went on to recommend the following action be taken to address coronavirus themed impacts on household debt:

  • Establishing local partnerships – the government should increase support for major debt charities, local authorities, stakeholders and communities to partner to address problem debt and promote engagement with debt advice. A place-based approach means leaders can tailor measures to reflect the needs of the community, whether that be more face-to-face financial advice, initiatives to promote early referrals of problem debt sufferers or campaigns to promote financial literacy.
  • Improved communication – information about debt and affordability should be in clear plain English, without impenetrable jargon. We recommend that the FCA (building on its work on vulnerability) collaborate with expert stakeholders to develop best practice guidelines.
  • Investment in technological and social innovation – to use digital practices such as ‘open banking’ to make it easier for people to plan budgets and to improve affordability checks by creditors, alongside action to reduce digital exclusion. Digital inclusion efforts should encourage the use of new technologies that increase financial literacy, give people access to high quality debt advice and expand access to open banking services. This should build on the Open Banking for Good initiative, supported through collaboration between business, civil society and government departments.
  • Improve access to affordable credit – including better access to low-cost credit though credit unions or other community finance initiatives with government support and funded through multiple stakeholder partnerships that reflect community opportunities and demand.

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