Millions of families are borrowing to cover basic bills and expenses, according to analysis that warns Britain is entering a dangerous new phase of the cost of living crisis.
Interest rates are expected to rise again this week and there are warnings about a “timebomb of debt” among poorer households. Reports suggest companies are targeting struggling single parents, using social media ads, to offer inappropriate debt repayment schemes that will leave them worse off.
According to Joseph Rowntree Foundation (JRF) analysis shared with the Observer, 2.3 million low-income families have reported taking out loans or using credit to pay essential bills during the crisis.
Political attention has focused on the impact of interest rates on mortgage payers, but they are also having an impact on those on tight budgets. In many cases, the option of borrowing is being cut off.
Nearly 6 million low-income families have unsecured debt, such as credit cards, overdrafts and personal loans from banks, credit unions and payday lenders. In May this year, they owed £14.2bn in total. Interest on this debt was £3.9bn, equivalent to about £675 a year per family.
Using credit to pay bills is not preventing households from falling behind with payments. Three-quarters report arrears with at least one household bill or lending commitment, with 44% in arrears with three or more bills. Meanwhile 2.8 million low-income households said they had been refused a loan between May 2021 and May 2023.
![Facing rising bills, Julie Anna Richmond from Enniskillen is sticking to a strict budget to clear debt.](https://i.guim.co.uk/img/media/6e6b2cd22290c621ac95bc5d1b27399d61a4bd3d/0_58_5184_3110/master/5184.jpg?width=445&dpr=1&s=none)
“The cost of living crisis is entering a dangerous new phase,” said Rachelle Earwaker, senior economist at JRF. “Even at this apparent peak in economic suffering, millions of low-income families continue to rely on the lifeline of unsecured lending to prevent them falling even further into severe material hardship. But with interest rates continuing to rise, it remains unclear how much more weight this option can bear.
“Despite inflation falling back, we risk the tragedy of a second wave in this crisis, as millions of people struggle to maintain their borrowing in view of rising interest rates. The fragility of the current situation ought to be a preoccupation for policymakers everywhere, but on the contrary, it is in danger of being overlooked. While rising mortgage costs dominate the national conversation, the affordability of short-term credit should also be a factor of vital concern.”
With energy prices falling and inflation showing signs of slowing, there are concerns among those on the frontline helping struggling households that the cost of living crisis has fallen down the political agenda. Emer Sheehy, principal policy manager at Citizens Advice, said it was still the charity’s top concern. “Our data is still at historic highs across the board on many of these issues,” she said. “If we don’t respond quickly, the likely result is a timebomb of debt as people find it impossible to make ends meet, or pay back any debts they’ve built up in the last year.”
She also warned that action was needed to tackle the targeting of struggling families by sellers of individual voluntary agreements (IVAs) that were not appropriate for many people in debt. “What we’re seeing in the debt landscape is a kind of wild west,” she said. “It’s a big problem that we see particularly with IVAs, which have grown exponentially.”
Julie Anna Richmond, 51, from Enniskillen, Northern Ireland, knows how long it can take to reverse a spiral into debt. She built up arrears a decade ago when she moved into a women’s aid refuge. She had fallen ill, had to quit her job and was no longer able to pay her bills.
“People think you’re in debt because you went on a spending spree or you have an issue with money, but that’s not always the case,” she said. With the help of Christians Against Poverty, she is now on a plan that will see her become debt-free by January, but rising costs this year have made it more difficult. “Electricity has gone up quite a bit and I have medical equipment,” she said. “I don’t want to contact CAP and ask to pay less [debt payments] because I really want to be debt-free in January. I’m sticking to a strict budget.”
There are now calls for the government to help by cancelling the deductions many low-paid households face from universal credit payments. Deductions are often made to clear earlier debts or to repay an advance. “It is crucial the government continues to uprate benefits with inflation and looks for ways to increase income for the most vulnerable households, for example by stopping unaffordable deductions from universal credit to repay government debts,” said Peter Tutton, head of policy at the StepChange debt charity.
A government spokesperson said: “We know people are struggling with rising prices, which is why we are delivering support worth on average £3,300 per household, uprating benefits in line with inflation and have increased the national living wage.
“We have invested a record £90m to support free debt advice in England and our Breathing Space scheme gives those facing financial difficulties space to receive debt advice, without pressure from creditors or mounting debts.
“Deductions help to protect claimants from enforcement actions such as eviction, make sure priority debts like child maintenance are addressed and recover money when overpayments are made.”
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