- The study
- Key findings
- Policy implications
- Points to consider
The study
This review forms part of the Joseph Rowntree Foundations programme to produce an anti-poverty strategy for the UK.
The review sought to consider:
- The relationship between debt, credit and poverty in the UK
- How policy and interventions on credit and debt can reduce and prevent poverty
- Which interventions and strategies should be included in a UK anti-poverty strategy.
The study employed a systematic review of studies published in the 15 years to 2014 in the UK, as well as the US, Canada and Australia and some from northern Europe. It prioritised high-quality evidence and excluded savings. The review’s definition of poverty was “when a person’s resources are not sufficient to meet their minimum needs”; it notes that studies included used a range of definitions. “Debt” was defined as problem debt –situations where individuals could not meet contractual payments or bills; “credit” was non-mortgage consumer credit.
Key findings
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Debt and poverty:
- Lower-income households were more likely to experience problem debt.
- Households facing problem debt are similar to those living in poverty or with low incomes – being a tenant (especially in social housing), not in employment (but not retired), working part-time or in low-status occupations.
- There was insufficient robust evidence to determine how far there is a causal relationship between poverty and problem debt, or indeed of the direction of any such relationship, although there is a clear correlation.
- The study concludes that problem debt is a consequence of poverty: precarious income means that unforeseen or life events can lead to financial difficulties and problem debt, a situation that it is difficult to escape from.
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Credit and poverty:
- Lower-income households are less likely to use credit, usually out of choice.
- While high-cost credit was used in a minority of cases, the majority of high-cost credit users are from the lowest-income households.
- Use of high-cost credit arises from lack of access to mainstream credit, but also out of choice because it better suits the needs of low-income households for short-term loans.
Policy implications
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Debt advice: Free and impartial policy advice appeared to offer more benefits than costs. There was little evidence that it lifted people out of poverty but it can help maximise income and reduce overall levels of debt.
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Affordable small-sum loans: Increasing access to such cash loans from not-for-profit lenders such as credit unions could help meet the needs of low-income households. There was however a risk that interest rates would need to be very high to ensure that such schemes were financially viable in the face of the likely high level of default. Alternatives such as the former discretionary Social Fund in the UK offered small sums and charged no interest but demand far outstripped resources.
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Credit regulation: Better enforcement might help prevent people getting into debt by ensuring that they could only borrow what they can afford to repay. The costs and benefits of such approaches had not been quantified.
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Debt Relief Orders and Low Income Low Asset Bankruptcy: These were new initiatives at the time of writing and so offered potential solutions that should be considered in an anti-poverty strategy.
Points to consider
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Methodological limitations:
- The review met a high standard of methodological rigour.
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Relevance:
- The study is relevant to a better understanding of the topics considered, even if it proved difficult to identify effective relationships and practice.
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Generalisability/ transferability:
- By its nature the review considered the issues at a high level.
- Wider changes in circumstances, such as the loosening of the lending cap on credit union lending, might have had unforeseen effects since the time of writing.
- The report notes that further evidence might change conclusions in time.
Full report
Poverty, debt and credit: an expert-led review - full report
