One in four of Britain’s poorest households are falling behind with debt payments or spending more than a quarter of their monthly income on repayments, according to a study.

The latest evidence of mounting debt problems for some of the most vulnerable in society is shown in a report by the Institute for Fiscal Studies, on behalf of the Joseph Rowntree Foundation, at a time when borrowing on credit cards, loans and car finance deals returns to levels unseen since before the 2008 financial crisis.

The poorest tenth of households are also more likely to be in net debt, owing more on plastic or on overdrafts and loans than they hold in savings. About a third of the poorest homes are in net debt, compared with only 10% of the highest-income tenth.

For a household of two adults and two children aged between 30 and 44 to be in the poorest tenth, they would have a net annual income of up to £23,200. Young adults are much more likely to be in households in arrears or paying large chunks of their income to banks or credit card providers, the study found.

David Sturrock, a research economist at the IFS, said: “Debt looks like a real problem for a significant minority of those on low incomes.”

The Bank of England has become increasingly concerned about the rapid growth of unsecured borrowing in the UK, which is rising at almost five times the rate of pay growth to levels unseen since the financial crisis. Borrowing on car finance has driven much of the growth, while the overall debt pile including credit cards and personal loans has now reached more than £200bn.

Threadneedle Street forced banks to increase their financial buffers for protection from customers defaulting, while also warning them about reckless lending.

However, the study found more than half of households have enough money in savings to pay off their debts, as they choose to borrow despite having cash left in reserve. More than 60% of all unsecured debt was taken out by households with above-average incomes, according to the report.

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Debt problems for the poorest households can prove persistent, and are of growing concern to the Financial Conduct Authority. Of the poorest fifth of households who were in arrears or spending more than a quarter of their income on debt repayments and charges in 2010, more than 40% were found to be stuck in a similar position two years later.

According to the Money Advice Service, there are now 8.3 million people in the UK with problem debts. Households are facing a year of static growth in real pay in 2018, as inflation outstrips wages as a result of the weak pound since the Brexit vote in June 2016, which may push people further into debt.

The IFS study found more than one in five people on low incomes have problem debts, compared with just one in 20 people at the top of the income scale. It found that on average the poorest fifth who are under pressure spend £457 a month on paying back their debts out of an income of £1,012.

Analysis by the Bank and the FCA published last week showed it was common for people to remain in debt even after paying off one of their credit cards, as they shift debts from one lender to another. The research found £9 out of every £10 of outstanding credit card debt in November 2016 was owed by people who were also in the red two years earlier.



Helen Barnard, head of analysis at the Joseph Rowntree Foundation, said: “Low-income households are facing a difficult 2018, with rising prices, frozen benefits and a wage squeeze all putting further pressure on household incomes.”



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