Urgent action is needed to avoid debt crisis


Urgent action is needed to avoid debt crisis

By Jessica Simpson, product manager at Aryza.

Poverty is rising and the UK is heading for a perfect storm of debt – with more and more working people on the breadline, many of whom are key workers.

Today, accruing a level of debt is completely normal and necessary to achieve certain goals in life – the most notable being mortgages or student loans. Yet, because of the rising disparity between wages and living costs, debt today isn’t about living outside your means – credit is being used with increasing regularity to subsidise even a basic standard of living.

An old issue made worse

Using credit to supplement income is now one of the most common reasons people fall into financial difficulty and seek debt advice. Their reliance on credit to make ends meet simply can’t be sustained, and so their situation becomes ‘in-work poverty’.

Sadly, this is unsurprising when viewed against average incomes for those in arrears. When looking specifically at the income data of individuals struggling with their personal finances, Aryza’s latest UK Debt Statistics Report found the average income to be £15,630 in Q3, 2021. Over 80% of consumers entering an IVA were also found to be earning less than £20,000 a year.

This is not a new phenomenon. In-work poverty has existed for many years, but it has risen sharply in recent decades. There are now 9 million working people reported as living in poverty, along with a 33% increase in food bank usage over the last 12 months.

A significant factor in this is undoubtedly the COVID-19 pandemic, which has had the biggest impact on those in low-income work. Sectors such as hospitality, retail and the arts were all forced to close during lockdown and are where people on low pay are more likely to earn a living.

This effect is compounded by the fact that low-income workers are also less likely to have savings, making them particularly susceptible to an unexpected financial shock. For those furloughed, it is unlikely they will have been able to address their income shortfall with savings, leaving credit as the only option.

Why is the perfect storm coming?

Support measures that came in during the pandemic, such as the furlough scheme and the Universal Credit uplift, have now either ended or are tapering down.

On top of this, other factors are starting to come into play, such as the increase in National Insurance from April next year, inflation expected to hit 4%, plus the rapidly spiralling costs of food, energy and fuel. These will all further exacerbate the pressure and people’s reliance on credit.

What can be done

All of this means that the number of people seeking advice for debt is increasing and will continue to do so. Effective, free, and easily accessible debt solutions will therefore be key but solving this impending debt crisis desperately requires more research into the root causes of in-work poverty.

The recently announced budget, including low-income tax cuts and an increase in minimum wage, may help in part, but in no way will solve the issue. For that, we need much more thorough research and radical plans. Urgently.

Download the full UK debt statistics report from Aryza here.