On 8 January 2015, StepChange explained that new research suggests households with modest “rainy day” savings were less likely to fall into problem debt. On the other hand, the same research shows 13m people lack the savings to keep up with monthly essential bills if their income dropped by more than 25%.
At a time of increasing personal debts, StepChange is calling for the government to adopt ‘An Action Plan on Problem Debt’ to help those with lower or no backup savings.
Why is the problem so big?
According to StepChange, there are 2.9 million people in the UK in severe problem debt. Many others are living on the edge. The problem is too big to ignore, given the proportions.
With no income to spare, many families will not be able to deal with income shocks or slow increases in costs of living without resorting to borrowing. In some cases borrowers also turn to payday loans which may not be the best solution for them. In some cases increased borrowing could lead to unmanageable debts.
What is the outlook for the problem?
Following the research commissioned, the economic outlook suggests that pressures on finances will continue. Potential increases in interest rates will make it even harder for families with middle incomes putting even more pressure on their ability to pay essential bills and finance/mortgage costs.
How to counter the problem?
– StepChange’s suggested Action Plan on Problem Debt
The plan will protect families in the next five years to better cope with income temporary shocks to deal with shocks to their finances. StepChange’s research suggests that £1,000 in savings would protect 500,000 households from problem debt.
StepChange calls for the government to commit to:
1. Establish a £1,000 savings pot for every family to cover income shocks using the successful auto-enrolment framework used for pensions.
2. Allow all low income households access to low cost credit products;
3. Protecting those vulnerable against interest charges, fees and enforcement;
4. Protecting children and families from aggressive debt collection practices.
5. Widening access to free debt advice.
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