An outstanding balance?

Inequalities in the use – and burden – of consumer credit in the UK

As the 2010s drew to a close, both policymakers and the press raised concerns about rising levels of UK household debt, with some warning it could soon bring about the next recession. Although household debt levels remain high in absolute terms, when compared against total household income they are substantially below levels reached during the financial crisis. More importantly, reductions in the Bank of England’s Bank Rate, along with a decade of loose monetary policy, have helped to drive down the cost of debt.

This briefing note argues that policymakers should turn their attention to the spread of consumer debt, and specifically the extent to which low-to-middle income households are increasingly exposed. Over the past ten years there has been a 10 percentage point rise in the proportion of lower-income households using some form of consumer credit (excluding student loans) – they have nearly caught up their counterparts at the top of the income distribution. This includes, for instance, a 13 percentage point rise in the share of households in the bottom income quintile using a credit card, as compared to a 4 point rise among those in the middle and 2 points among those in the top.

Despite a decade of low interest rates, the burden of debt remains substantially higher for those households at the bottom of the income distribution. For instance, typical consumer debt repayments, relative to monthly pre-tax income, remain nearly 3 times as high for households in the lower-income quintile compared against their higher-income counterparts. This growing level of financial fragility will have real effects on the lived experience of lower income households, as evidence shows that lower-income households with outstanding consumer debt tend to experience more financial stress than both their counterparts in the bottom income quintile who do not have any outstanding consumer debt and those in higher income quintiles who do.