The document analyzes data from the Money Advice Service on households that are over-indebted in the UK. It finds that while aggregate debt levels have not caused a crisis due to loose monetary policy, there remains a significant vulnerable segment of lower-income households. Many of these households have been unable to reduce debts when possible. While most over-indebted households are currently in arrears, there is also a group that is current on payments but still under heavy financial strain, who may be exposed if interest rates rise before their situations improve. This "current but stressed" group resembles those in arrears in many ways, but is less likely to have sought help and more likely to still have access to credit.

1. ……………………………………………………………………………………………………..
Crisis averted,
or delayed reaction?
Analysis of Money Advice Service data
on the over-indebted population
November 2013
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2. We haven’t experienced the debt crisis many envisaged
in 2008; is it still to come?
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• At the aggregate level, loose monetary policy has
helped avoid the wave of defaults many predicted
• But data suggests there is a significant vulnerable
rump, especially among lower income households
• Many have been unable to take advantage of the
window of opportunity for paying debts down – and
may still be exposed when rates start to rise
• Would benefit from pre-emptive support, but difficult
for banks and policy makers to identify those who are
current but close to the edge
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3. The net worth distribution has become more
skewed over the course of the downturn
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Net worth
(assets less
liabilities) fell
between 2005
and 2012
among the
bottom threequarters of
mortgagors
and increased
for the
wealthiest
quarter
Source: Bank of England, NMG Consulting
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4. The net worth distribution has become more
skewed over the course of the downturn
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Among
renters,
around half
have negative
net worth,
with the
picture again
deteriorating
since 2005 for
all but the top
20 per cent
(Note the
different scale)
Source: Bank of England, NMG Consulting
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5. And debt repayment exposures are highest in the
bottom half of the income distribution
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50%
5.0
Average repayments as share of income (lhs)
45%
4.5
Proportion spending more than 25% gross income on repayments (lhs)
40%
4.0
Average debt-income ratio (rhs)
35%
3.5
30%
3.0
25%
2.5
20%
2.0
15%
1.5
10%
1.0
5%
0.5
0%
0.0
1
(lowest)
2
3
4
Source: Bank of England, NMG Consulting
5
6
7
8
9
Although
higher income
households
hold more
debt on
average,
debtors in
lower deciles
are much
more likely to
be allocating
more than
one-quarter of
their (gross)
income on
repayments
10
(highest)
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6. The numbers of households in ‘debt peril’ has fallen
since 2007, thanks to ultra-loose monetary policy
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Source: Modelling based on ONS, Living Costs and Food Survey
The proportion
of households
in ‘debt peril’
peaked at over
3% in 2007,
just prior to
the financial
crisis
With the base
rate at a
historic low,
the proportion
fell to around
2% in 2011
(and may be a
little lower still
today)
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7. Clearly an increase in interest rates today would push
large numbers of households into peril
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A 2ppt
overnight
increase in the
base rate would
push 4% of
households into
debt peril
Clearly this
cannot happen,
but illustrates
the level of
sensitivity to
interest rates
and the
importance of
the current
monetary
Source: Modelling based on ONS, Living Costs and Food Survey
stance
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8. Under ongoing low rates and good household income
growth, exposure to debt is broadly constant
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Taking an
optimistic view
about income
growth – that
it keeps pace
with GDP and
is evenly
shared – the
proportion of
households in
peril would
increase
slightly to just
under 3%
Source: Modelling based on ONS, Living Costs and Food Survey
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9. But ‘bad’ income growth and a modest interest rate
shock produces a doubling of ‘debt peril’ levels
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Under the
worst (yet still
plausible) of
our scenarios,
the proportion
of households
in ‘debt peril’
would jump to
around 5%,
more than
double the
baseline level
and
significantly
higher than
the levels
recorded even
at the start of
Source: Modelling based on ONS, Living Costs and Food Survey
the crisis
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10. Can divide over-indebted population into those already
displaying distress and those who may be ‘hidden’
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Don’t consider self
to be in debt (4%)
Over-indebted
population
(18% of all adults)
Consider self to be
in debt (14%)
Missed or fallen
behind on credit
payment or bill in
three of last six
months (10%)
Up to date with
payments but find
debts a heavy
burden (4%)
Around twothirds of those
who are
considered to
be overindebted are in
arrears on
some
payments, but
a sizeable
minority are
up to date but
highly stressed
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11. Those who are current but stressed appear to carry
their burden for longer than those in arrears
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For how long have you struggled with bills and credit commitments?
Those in
arrears are
perhaps more
likely to take
or be forced
into remedial
action which
means they
remain in the
data for a
shorter
amount of
time than the
current but
stressed group
Source: Money Advice Service
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12. In many ways, those who are current but stressed look
much like those in arrears
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In current climate, living in debt is inevitable for people like me
All of those
considered
over-indebted
report similar
responses,
with close to
three-quarters
believing that
living in debt is
an inevitability
in the current
context
Source: Money Advice Service
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13. In many ways, those who are current but stressed look
much like those in arrears
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I can't see that I’m ever going to be in a situation where I am free of debt
In both
instances, just
over half can’t
imagine being
free of debt at
any point, and
only onequarter
actively
disagree with
this statement
Source: Money Advice Service
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14. In many ways, those who are current but stressed look
much like those in arrears
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My debt means I can’t always afford to buy basic household items
Those already
in arrears are
a little more
likely to say
that their debt
means they
sometimes
can’t afford
the basics, but
close to half of
those who are
still current are
also in this
position
Source: Money Advice Service
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15. The key difference is in relation to access to, and use of,
further credit
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In the last 12 months, have you found it difficult to get credit?
One-quarter of
those who are
current but
highly stressed
say they’ve
found it
difficult to
access credit in
the past 12
months,
compared with
more than half
of those in
arrears
Source: Money Advice Service
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16. The key difference is in relation to access to, and use of,
further credit
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I have been declined credit in the last six months
One-fifth of
the current but
stressed group
say they’ve
been declined
credit, but
more than
two-fifths
actively
disagree –
suggesting
they’ve
accessed new
credit
Source: Money Advice Service
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17. The key difference is in relation to access to, and use of,
further credit
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I can only manage my monthly finances by paying for things on credit card
Around onequarter of
both overindebted
groups are
reliant on
credit cards,
but a higher
proportion of
the current but
stressed group
disagree with
the statement
Source: Money Advice Service
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18. The key difference is in relation to access to, and use of,
further credit
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I am getting a good deal on my credit cards/loans
Fewer than
one-fifth of the
over-indebted
think they’re
getting a good
deal on their
credit cards
and loans,
with the
current but
stressed group
doing very
slightly better
Source: Money Advice Service
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19. In terms of dealing with difficulties, the two groups
display some similarities and some differences
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I would be too embarrassed to discuss my financial situation
Levels of stigma
appear broadly
similar across
the overindebted, with
around twofifths saying
they’d be too
embarrassed to
discuss their
financial
situation
Source: Money Advice Service
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20. In terms of dealing with difficulties, the two groups
display some similarities and some differences
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I’m worried that other people think my money difficulties are all my own fault
And around
one-half saying
that they are
worried that
other people
think their
difficulties are
all of their own
making
Source: Money Advice Service
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21. In terms of dealing with difficulties, the two groups
display some similarities and some differences
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I’m don’t have the confidence to negotiate with the people I owe money to
Those already
in arrears are
more likely to
show a lack of
confidence
about
negotiating
with creditors,
but fewer of
those who are
still current
consider the
question to be
relevant to
them
Source: Money Advice Service
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22. In terms of dealing with difficulties, the two groups
display some similarities and some differences
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Being aware of my legal rights and obligations would help me fix my situation
Those already
in arrears are
much more
likely to say
they need help
to establish
their legal
rights and
obligations,
though half of
the current but
stressed group
are also in this
position
Source: Money Advice Service
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23. In terms of dealing with difficulties, the two groups
display some similarities and some differences
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Putting together a weekly or monthly budget would help me fix my situation
More than 90%
of the overindebted think
drawing up a
budget would
help, but
significantly
fewer of the
current group
think they need
help to establish
this
Source: Money Advice Service
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24. We haven’t experienced the debt crisis many envisaged
in 2008; is it still to come?
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• Ultra low interest rates offer a window of opportunity,
but the sequencing of income growth and monetary
tightening in the coming years is uncertain
• Members of the ‘current but stressed’ group are likely
to be particularly exposed to a changing interest rate
environment
• They are just as troubled as those in arrears, but are
less likely to have presented to date and more likely to
still have access to credit
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25. We haven’t experienced the debt crisis many envisaged
in 2008; is it still to come?
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• Credit access can help with restructuring, but could
also lead to further difficulties down the line
• In everybody’s interests to identify this group before
borrowing costs rise, but difficult
– Individual lenders have incomplete information and a lack of
immediate incentive
– Borrowers may not seek help due to stigma and
embarrassment
• Cost of living squeeze limits potential responses even
where families can be identified
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