The poorest are not the most debt vulnerable

The Financial Conduct Authority is exhorting lenders to focus more on the affordability to the recipient of the credit they offer, but how can you determine affordability? A possible clue comes from the latest slew of data on wealth and assets released by the Office of National Statistics last week.

This includes a measure of net financial assets - cash savings less non-mortgage debt. If this is negative, then you owe more cash than you have available and so would need to sell an asset (if you have one) or declare insolvency to meet your cash liabilities if your income stream dries up.

What the new data shows is that those on the lowest incomes are - by a few percentage points - not the most debt vulnerable. In the lowest income quintile 24% of households have negative financial wealth, but in the three middle income quintiles the numbers are higher at 27%, 28% and 26% respectively (see chart below).

What this means for public policy is that the traditional credit lines for people on middle incomes such as hire purchase and credit cards have the potential to cause just as much hardship as the credit available to those on lower pay.

More middle earners are debt vulnerable if they face a shock to their incomes, caused by, for example, redundancy, ill-health, or a change in family circumstance: having a lower income of itself does not correlate with being over-burdened by credit.

What began as a regulatory focus on payday loans will therefore potentially have huge impact on the market for other forms of household borrowing.

Kitty Ussher, Managing Director, Tooley Street Research

July 9th 2014