A debt effect? How is unmanageable debt related to other problems in people’s lives?

In the years after the financial crisis, levels of unsecured personal debt in the UK fell from a historical peak of 23% of disposable income in 2008 to its current level of around 15%. That trend has now started to reverse. Unsecured debt is now growing faster than incomes and faster than secured debt, and the Office of Budget Responsibility (OBR) has forecast  the level of unsecured debt to return to pre-crisis levels by the end of the decade.

Within wider concerns about the possible impact of a return to such high levels of debt on the economy, there is an ongoing challenge faced by the individuals and families who have unmanageable debt, of managing their financial situation.

Unmanageable debt is unevenly distributed

Five per cent of adults in the UK have unsecured debt equivalent to six months or more of their income, when you take into account their financial assets such as their savings, which is commonly used as an indicator of unmanageable debt. When looking at different groups in society however, the proportions of people with unmanageable debt are far higher. For example:

• Those in the lowest income group are three and a half times more likely than the highest earning fifth of the population to have debt worth more than six months of their income (7% compared to 2%)

• 20-29 year olds are twice as likely than 30-39 year olds to have debts worth more than six months of their income. (14% compared to 7%)

• Private renters are nearly twice as likely as those with a mortgage, and five times as likely as those who own outright, to have debts worth six months of their income. (10%, 6%, 2% respectively)

The impact of unmanageable debt

Those high levels of debt are a concern, not just due to the financial strain they can cause - households can end up paying back far more than they borrowed and their repayments can mean they don’t have sufficient income - but because unmanageable debt is closely related to wider problems in people’s lives. Unmanageable debt has been shown to be related to financial exclusion, family breakdown and poor physical and mental health.

In this research [ 0.9 mb] we use data from the latest wave of the Understanding Society survey to investigate the statistical evidence for the relationship between high levels of debt and a range of wider issues; unemployment, low pay, physical health problems and poor mental health, that our advisers see on a daily basis (for a full methodology, see appendix 2). We find strong evidence of the close link between unmanageable debt and poor mental health.

Debt and mental health

Looking at the relationship between unmanageable debt and mental health more closely, we found people with unmanageable debt are 24% more likely to have a mental health score in the bottom quarter of the population (1).

When looking at the relationship from a different angle, comparing the population as a whole with people with below average mental health scores, they are:

• Over a fifth more likely to have debts

• Twice as likely to be behind on a household bill

• Nearly two thirds more likely to be behind on their council tax

The close relationship between unmanageable debt and poor mental health is the result of ‘two-way’ causation. Debt both contributes to, and is a product of, poor mental health.

Our experience of giving advice

Those findings chime with our own experience of giving debt advice to over 350,000 people a year. More than half (54%) of our debt clients have a problem in at least one other area, such as with their employment or housing, and nearly three quarters of debt clients say they felt anxious or stressed because of their debts.

The impact on behaviour

A further impact, and a possible explanation for why unmanageable debt can lead to wider problems in people’s lives, is that debt can affect people’s behaviour. This research uses national polling data to show that people with unmanageable debt are more likely to say their debt stops them from taking major life decisions. For instance:

• 49% say they are less likely to start a business (compared to 33% generally)

• 41% say it makes them less likely to study or retrain (compared to 27% generally)

• 34% say it makes them less likely to move location (compared to 25% generally)

• 28% say it makes them less likely to change jobs (compared to 19% generally)

More preventative advice

Unmanageable debt can affect people’s welfare, particularly their mental health, and influence their attitudes and how they make decisions. Advice services can help mitigate that effect by helping people to avoid getting into problem debt in the first place.

Money guidance should be offered to people at key moments in their lives in order to:

• Help people adjust to major changes in their lives

• Prompt people to review their financial situation, sort out ony problems before they get become unmanageable, and to save for the future

• Encourage people, who are already struggling to manage their debt, to get help and so limit its wider effects

(1)  Mental health scores are assigned to survey participants based on answers to a number of questions in the Understanding Society survey. The method of scoring is commonly used by health researchers. See Appendix 3 for a full methodology. 21% of those with high debt have poor mental health compared to 17% of those who don’t.