The Centre for Responsible Credit (‘CfRC’) and Jubilee Debt Campaign have today called on the Government, the Bank of England and the Financial Conduct Authority to instigate a Household Debt Jubilee in order to release low income households from billions of ‘unjust’ consumer credit debt.
In a joint briefing paper, to be launched at a Parliamentary event this evening, we set out our findings from new CfRC analysis of official data sources. This indicates that consumer credit borrowing has accelerated amongst low to middle income households in the past two years, and that this is now both severe and unsustainable.
Key findings include:
- 3 million households (containing approximately 7 million people) are now severely indebted – paying more than a quarter of their income to their creditors. Of these, over three quarters (77 percent) are living in households with incomes below £38,000 per year;
- The debt to income ratio of the poorest fifth households has doubled in the past two years, as falling real wages and welfare cuts, for those in and out of work, have hit hard and forced many to borrow in order to meet the rising cost of living;
- The poorest households now owe an average of £9,800 to consumer credit lenders, and are paying at least 10 percent of their incomes on debt interest and 35 percent on debt repayments overall;
- These households owe more, relative to their income, than better-off households, and in many cases will take as long as 10 years to clear their debts.
The report proposes a package of measures to address this emerging crisis, based on the principle of eradicating ‘unjust debt’. This is defined as debt which is causing harm to borrowers because it is creating a debt trap; causing material deprivation, or is exploitative in nature.
The package comprises the following steps:
- STEP 1: Identify households caught in a debt trap and/or or likely to be experiencing material deprivation (using a 30% debt to income ratio as the basis);
- STEP 2: Require lenders to modify existing agreements to reduce the consumer credit debt to income ratio to a maximum of 30% (and write-off the rest);
- STEP 3: Introduce a cap on the cost of credit and provide redress for borrowers that have already paid more than 100% in interest, fees and charges on their debts; and
- STEP 4: Government or Bank of England buy-up of ‘bad’ debts on the secondary market, in order to substantially write-down the outstanding amounts.
We estimate that this programme would impact around £40 billion of consumer credit debt, with policy decisions needed concerning how far any write-off should be funded through money creation (similar to Quantitative Easing) and how much of this cost should be borne by lenders.
The Parliamentary launch of the report will be chaired by Liberal Democrat Peer Lord Sharkey, and will involve responses from the actor and political activist Michael Sheen; Deputy General Secretary of the TUC, Paul Nowak; and Chief Executive of the New Economics Foundation Miatta Fahnbulleh.
Launching the report, Sarah-Jayne Clifton, Director of Jubilee Debt Campaign said:
“The UK is facing a severe household debt crisis that is hitting poorest families the hardest. Low wages, insecure work and rip-off lending are driving people into debt and keeping them there. Families across the country are having to take on debt just to heat their homes and feed their kids. This cannot continue. We need to give these families a fresh start and the only way to do that is through some form of debt write-off.”
Damon Gibbons, Director of the the Centre for Responsible Credit, said:
“Government, the Bank of England and Financial Conduct Authority need to come together urgently and provide a coherent and credible plan to tackle Britain’s rapidly developing consumer credit debt crisis. Despite repeated acknowledgements that the household debt burden is unsustainable we have seen next to no action to address it. Our suggested package of measures would not only boost the economy but also help relieve the pressure on public services that the misery of debt for low income households is now creating.”
A detailed appendix setting out the CfRC methodology used to assess the consumer credit debt burden is available here.