debt
TRANSCRIPT
Stephen McKay, Personal Finance Research Centre
Research completed with Elaine Kempson (PFRC) and Maxine
Willitts (DWP – SRD)
How much do families owe? Levels of debt among British households
SRA evening seminar
26 July 2004
2 Outline of presentation
• Background.
• Some key concepts.
• Aims.
• Data.
• Findings:– Cross-sectional results.– Panel analysis.– Effects of arrears.
3 Media frenzy on debt in recent times
• BBC News:– ‘Britain is a nation up to its eyeballs in debt.’ 12.9.03– ‘Credit card debt “still soaring”’ 15.4.04– ‘Consumer debt continues to soar’ 22.04.04– ‘Debt creeps towards £1 trillion’ 29.6.04
• Daily Express– ‘Debt disaster’ 20.11.02– ‘consumers in massive debt’ 23.4.03
• Daily Mail– ‘Britons struggling with debt burden’ 21.5.03
• Guardian– ‘borrowed time’ 30.10.03
• Conversely, MORI: – “Credit card debt ‘overstated, over reported and largely a myth’” 20.7.04
4
5 Aggregate picture
• Rising levels of borrowing, with secured lending growing faster
than unsecured – But total wealth remains much larger.
• Debt as a proportion of income rising over time, with
debt/income reaching 130% compared with <80% in late
1980s– Trends similar in other OECD countries
• Interest payments/income (debt-service ratio) stable since
1999, and half the level of early 1990s.
• But distributional issues may not reflect the aggregate picture
…
6 Long history of previous debt research if you dig deep enough, mostly ad hoc• Extensive PSI Survey, Berthoud and Kempson (1992)
• ‘the rise and rise of consumer credit over the last ten years’ …
‘remarkable rise in number of credit cards in circulation (NCC 1990).
• ‘Whilst the wealthy use credit as a clever expedient it remains an
essential part of the lives of the poor’ (Tebbutt 1983)
• ‘I have little doubt that 70 to 80 per cent of working-class families
supply their requirements on credit’ (Whitelock 1914, Economic
Journal).
• Johnson, P. (1993) ‘Small debts and economic distress in England and
Wales, 1857-1913’ Economic History Review 46, pp. 65-87.
• Hammurabi’s code (1792 to 1750 BC), regulation of credit terms:
– “If a inn-keeper gives 60 liters of beer on credit he will receive 50 liters of barley at harvest-time.”
7 Some key concepts explored
• ‘Debt’:– commitments or arrears;– arrears and financial difficulties;– ‘debt’ and financial exclusion.
• Commitments:– consumer credit and household bills;– secured and unsecured lending.
• Over-indebtedness– No generally agreed definition, some indicators.
• Analysis– snapshots and panel data;– households, families and individuals.
8 Arrears and financial exclusion
Financial exclusion
Debt status Excluded Not excluded
In arrears Use of non-standard lenders with high interest rates. Past history of debt.
Using credit cards, etc. over-committed or affected by change in circumstances.
Not in arrears Low income cash economy, some careful managers, often older group.
Managing financial products with no problems, and/or on a high income.
9 Study aims
• How many families are in debt?
• Characteristics of families in debt?
• What are the changes in levels of debt over time?
• How do changes in circumstances, e.g. loss of
employment, changes in household composition,
affect these levels?
• How does debt relate to movement into work?
10 Data analysed in the study
• No ideal single source (yet?)
• Families and Children Study (FACS) – surveys in 1999, 2000,
2001 and 2002 (… continuing).
• DTI/MORI Over-indebtedness Survey, undertaken in 2002
(OdS) – ‘Kempson Report’.
• British Household Panel Study (BHPS), 1995 & 2000.
• ONS 2000 Study of Psychiatric Morbidity Among Adults
Living in Private Households.
• Poverty and Social Exclusion Survey (PSE) 1999.
11
Snapshot results
12 Credit commitments (BHPS/NMG)
1995 2000 2003
Bank
Owe anything, among individuals 36 36 34
Owe anything, among households 50 51
Median amount owed £890 £2,000
Top quarter £2,700 £5,000
Overall: Heavy burden 3 2
Somewhat of a burden 9 9
13 Levels of commitment (BHPS 2000)
‘Burden’ of
debt
Median
credit
Mean
credit
Median
hh income
Average
age
Has
children
Heavy £4,000 £6,500 £1,920 36 54%
Somewhat £3,000 £4,800 £2,490 37 54%
Not £2,000 £3,900 £2,750 40 40%
Doesn’t
owe
£1,720 51 24%
14 Credit repayments as proportion of gross monthly income (OdS)
5333
2635
2232 42
29
8 1215
113
68
5
2613 9 15
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
All hhlds Allfamilies
Loneparents
Coupleparents
Unknown
50%+
25-50%
10-25%
<10%
Nothing
15 Proportions in arrears – OdS data/FACS
• 13 per cent of households in arrears in 2002 (plus
7 per cent in financial difficulties)– 18 per cent in past 12 months
• 22 per cent of families with children in arrears
(FACS gives 18%)– 30 per cent in past 12 months
• 36 per cent of lone parents in arrears (FACS gives
35%)– 48 per cent in past 12 months
16 Types of arrears in 2002 (OdS)
4 6 96
11
19
2
4
9
0
5
10
15
20
25
30
35
40
All households Families withchildren
Lone parents
Both
Household bills
Credit
17 Money value of arrears by family type
£295 £300 £290 £270
£385
£740 £700
£890
£665
£880
£0£100£200£300£400£500£600£700£800£900
£1,000
Allfamilies
Loneparents
Couples Non-working
LPs
No-earnercouples
Median Top quarter
18 Direct causes of arrears, self-reported
42
1512 11 9
31
1713 14
10
05
1015202530354045
Loss ofincome
Lowincome
Overlookedor withheld
Increasedoutgoings
Over-committed
All households
All families
19 Higher gross incomes reduce the likelihood of arrears (families with children)
05
10152025303540
<£7500 £7500-£14999
£15000-£24999
£25000-£34999
£35000+
Gross household income
Per
cen
t in
arr
ears
Any arrrears
Credit arrears
Bills arrears
20 Arrears were more likely for families with children …
• Among younger groups (esp. for consumer credit).
• Among tenants.
• Where they had multiple credit commitments.
• Among larger families.
• Among families in hardship – a ‘depth’ measure.
• In more deprived areas.
• Where people had mental health problems of
various kinds (probably effect as well as cause).
21 Arrears declining over time, among families with children
0
10
20
30
40
50
60
1999 2000 2001 2002
Year
Per
cen
t in
arr
ears
Lone parents
IS recipients
Workless couples
All families
22 Multivariate analysis of having arrears
• Logistic regression model of being in arrears.
• Wide range of factors having additive effect on
modelling a bivariate outcome (arrears, or not)
• Alternatives – look at each type of arrears
separately, tobit model of extent of arrears
(Bridges/Disney 2004), two-stage models of credit
acceptance then arrears, tree-based approaches.
23 Main findings on being in arrears – FACS data
• Results control for a range of different variables.
• Having savings drastically decreases risk of arrears.
• Low income significant, but not above bottom quintile.
• Drops in income in last year associated with arrears
(improving circumstances no effect).
• Tenants more likely to have arrears.
• Also – health, age, region.
24 Main findings on being in arrears – OdS data on all households
• Results control for a range of different variables.
• Tenants more likely to have arrears.
• Age group.
• Drops in income.
• Having a current account.
• Number of active credit commitments.
25 Segmentation approach for families - simplified (ID3)
Arrears [100]
Saved<£50 [147] Saved £100+ [58]Saved £50-99 [102]
Recent changes Housing tenure
Housing tenure Qualifications
Housing tenure
26
Credit and arrears: changes over time at individual level
27 Borrowing tends to persist, with turnover (BHPS 1995 & 2000)
25
14
16
45
Borrower bothyears
1995-only
2000-only
Neither year
28 Borrowing tends to persist, with turnover higher for 20-59 year-olds (BHPS 1995 & 2000)
31
1818
33 Borrower bothyears
1995-only
2000-only
Neither year
29 Arrears often short-lived (FACS)
• One family in three (34%) with arrears in one year
didn’t have them the next.
• Conversely, one family in four (26%) without
arrears in one year did have them the following
year.
• Arrears on household bills are more persistent than
on consumer credit (under half, compared to more
than half, exit such arrears each year).
30 Pattern of having arrears in 2001-2002
58 6441
23 22
28
19 1431
0
20
40
60
80
100
120
All families Couples withchildren
Lone parents
Never One year Both years
31 Patterns of arrears 1999 – 2002
• Lone parents and low-income couples with kids in
all 4 surveys..
• Arrears in 3/4 years: 34%, 1/2 years: 37%, never:
29%.
• LPs: 40% in arrears for 3/4 years, compared with
28% of low-income couples
• Higher arrears incidence with:– presence of younger children; not being in paid work;
poor health; social tenants
32
Findings on effects of arrearsPanel results
33 Arrears and transitions into work
• Concern that moving into
work is hampered by
indebtedness, or that the
transition may trigger
borrowing or arrears.
• Lenders’ policies (and
borrowers’ attitudes) could
mean that effects operate in
different directions.
• Limited FACS evidence to
support either effect
2001-02
transition
into work
With
arrears
No
arrears
Lone
parents
17% 17%
Couples 19% 20%
34 Arrears and wider effects
• Having arrears associated with leaving paid work
(though limited transitions to investigate).
• Family formation:– couples twice as likely to split during 2001-02
where there were arrears (esp. rent arrears, arrears on bills);
– lone parents with arrears perhaps slightly more likely to re-partner (perhaps reflecting younger age group in paid work).
35 Main conclusions
• Still confusion about what is meant in discussions
of debt and over-indebtedness.
• Growth of credit remaining strong.
• Still only a small proportion experiencing credit
difficulties (particularly arrears).
• Considerable annual change in arrears and
borrowing among people.
• Effects of debt – few strong substantiated effects.
36 Owe money by BHPS variable age
42
60
55
49
33
18
5
0 10 20 30 40 50 60 70
16-24
25-29
30-39
40-49
50-59
60-69
70+
37 Owe money by BHPS variable sex
38
35
32 33 34 35 36 37 38 39
Male
Female
38 Owe money by BHPS variable ‘race’, sample N in [ ]
36
53
43
62
23
6
29
31
46
0 10 20 30 40 50 60 70
White
Black - Carib [56]
Black - African [31]
Black - other [22]
Indian [105]
Pakistani [74]
Bangladeshi [22]
Chinese [9]
Other [72]
39 Owe money by BHPS variable religion (ioprlg1)
4429
4032
2920
2718
3142
1921
4335
32
0 10 20 30 40 50
None
C of E
Catholic
Ch Scot
Free Presyb
Methodist
Baptist
Congreg/URC
Other Chr denom
Chris no denom
Islam
Hindu
Jewish
Sikh
Other
40 Owe money by BHPS variable region
4033
3833
293232
3537
4537
3633
40383839
4131
0 10 20 30 40 50
I LondonO London
SESW
E AngliaE Mid
W Mid urbanW Mid
Gr ManMerseyside
NWS Yorks
W YorksYH
TyneN
WalesScotland
NI
41 Owe money by BHPS variable hllt
26
38
0 10 20 30 40 50
Health limitsdaily activities
Not limited
42 Repayments a burden by BHPS variable hlstat (health status)
2
2
3
4
4
8
9
9
8
9
0 5 10 15
Excellent
Good
Fair
Poor
Very poor
Heavy burden Somewhat