New report shows how money troubles come quick

Feb 14 2010 by Michael Kelly, Sunday Sun

THE harsh day-to-day reality of dealing with debt has been exposed in a hard hitting report which revealed how low income families have been hurt most by the recession. The authors followed the fortunes of families across the North and the rest of Britain to find out how, or if, they coped. Mike Kelly reports.

The report highlights what has happened from the heady days of the boom period when banks were desperate to lend and consumers were happy to spend and worry later. Average household debt rose to 167% of disposable income and Britain faced a personal debt mountain of £1.4 trillion.

It reveals that there were no safeguards in place to cater for the inevitable “bust” period, that many of the big financial institutions are too inflexible when it comes to deferring payments and exposed the short term saving mentality of the British themselves.

The inflexibility of the banks paved the way for the success of the door step lenders. Dalia explained: “People know they are paying ridiculous amounts of interest but they are able to defer payments.”

Of course they are allowed to defer payments at a price and the debt spiral continues.

Recent figures show the Department of Work and Pensions spent £897,000 a day on emergency loans - there for people with nowhere else to turn - up from £590,000 in 2008.

The Government’s free debt advice service is turning people away because it cannot cope with a 28% rise in demand.

Dalia said: “Low-income families were bearing the brunt of the increase in prices - in food, fuel and other utilities. More than a quarter experienced a sudden drop in household income as a result of redundancy, having their hours reduced or ill-health. We wanted to see how people managed their finances, how they dealt with Christmas and their attitudes to credit. We got a sense of how people were coping throughout the recession.

“To see the sacrifices families are making on a daily basis was overwhelming. The families went to huge efforts to provide for their children.”

At the root of the problem, the IPPR report concludes, is the debate around access to credit which it says is riddled with inconsistencies.

The expansion of credit has been underpinned by social justice arguments for the democratisation of credit and the rights of low-income families to own their own home. Yet this access relies heavily on debt.

At the same time, problem debt is often taken as a sign of financial mismanagement and much policy time has been devoted to encouraging behaviour change.

Yet not all low-income families using credit get into debt - low pay, job insecurity and fluctuations in expenditure cause considerable strain and make it difficult to plan ahead.

As a result of its research, the IPPR is calling for low-income families to be given life-long savings accounts, more affordable credit initiatives, a website on which to compare lenders and free and impartial financial advice.

It also argues that policies to broaden the appeal of renting should be investigated.

“Our reliance on debt - far from creating opportunity - has created vulnerability during the recession,” said the report.