CONSUMER CREDIT UNEVEN PRESSURE The rising costs-of-living is not being felt evenly across the income spectrum, so what does this mean for debt anxiety and arrears. BY SARAH COLES It can be difficult to see the overall impact of rising prices when we look at today’s inflation figure. Brave | Curious | Resilient / www.cicm.com / <strong>March</strong> <strong>2024</strong> / PAGE 18
CREDIT MANAGEMENT LIFE got harder in 2023, dealing a real blow to our financial resilience. The new edition of the Hargreaves Lansdown Savings and Resilience Barometer, which is carried out in partnership with London Economics, found that overall resilience fell 0.5 points to 60.9 (out of 100). It’s still above pre-pandemic levels, but a third of the pandemic gain has been wiped out. The Savings and Resilience Barometer is structured around the five pillars of financial behaviour that are fundamental in order to balance current and future demands, while guarding against risks. These are: controlling your debts, protecting your family, saving for a rainy day, planning for later life and investing to make more of your money. Relentlessly rising prices for well over a year have taken a toll. It can be difficult to see the overall impact of rising prices when we look at today’s inflation figure. However, the Barometer shows the cost of living has increased 18.4 percent in the past two years. This hasn’t been felt evenly across the income spectrum, so the resilience gap between higher and lower earners is widening. For higher earners, life has actually been getting easier. The highest fifth of earners have seen the proportion scoring ‘good’ or ‘great’ for overall financial resilience rise from 77 percent in 2019 to 86 percent at the end of 2023. Meanwhile, lower earners are still being clobbered by the cost-of-living crisis. The lowest fifth of earners with ‘good’ or ‘great’ scores fell from three percent to two percent. Debt crisis Lower earners were less able to build up lockdown savings during the pandemic. They were also less likely to have investments or own property – both of which increased in value – so by the end of the peak of the pandemic they were worse off. As we emerged from one crisis, we were then plunged into another, and the rising cost-of-living has taken a toll on the resilience of lower earners too. They already had less room in their budgets but were hit harder by rises in the cost of the essentials – including a 23.9 percent increase in the cost of food and non-alcoholic drink. Increasingly, they have spent any savings and cut every cost, and have run out of road. The debt position of lower earners has deteriorated since the onset of the pandemic, while for everyone else it has improved. The debt scores for those on lower incomes are significantly worse than they were before the pandemic, falling three percent - compared to a two percent rise in the debt scores of higher earners. Debt anxiety and arrears are a particular concern. More than a quarter (27 percent) of the lowest earners are in arrears, while 37 percent have debt worries. It’s easy to see why, because their debt repayments (excluding mortgages) are painfully high compared to their incomes. The lowest fifth of earners have average debt repayments of £168 a month, compared to £141 among the second lowest fifth, and £315 among middle earners. Forecast Overall resilience is expected to stay at the current level throughout <strong>2024</strong>, as National Insurance cuts and lower inflation are offset by smaller wage rises and frozen tax thresholds. However, when it comes to National Insurance cuts, lower earners benefit less. Once you subtract extra tax caused by frozen thresholds from the National Insurance cuts, the average earner is £13 better off, and those on lower-than-average incomes will actually be worse off. It means the resilience gap could widen further. Lower earners are also likely to suffer if there are no more cost-of-living payments announced after the last one in February <strong>2024</strong>. These have gone to lower earners and retired people and made a significant difference in boosting their resilience. It means there is a risk they will continue to turn to debt to make ends meet, and more people will fall into arrears as they can’t afford their debt repayments. Falling interest rates could ease the pressure as we go through the year, but these are far from guaranteed and rely on the market being right about its forecasts for interest rate cuts. If you’re holding out for this to solve your debt problems, it’s a risky strategy, so it’s far better to face it head-on and talk to a debt charity like Stepchange or National Debtline sooner rather than later. About the Barometer This is a huge piece of analysis we do every six months in partnership with Oxford Economics, bringing together 16 separate measures from official datasets, and using statistical modelling to build an overarching picture of people’s financial resilience – from how much savings they have, to whether they’re on track for a reasonable retirement income. It gives us an overall picture of whether we are getting stronger or losing resilience, and tells us where people are vulnerable, and about the gaps in their finances. We can also use the model to see the impact of big changes in the world around us – like rises in mortgage rates and house price drops. It is structured around the five pillars of financial behaviour that are fundamental in order to balance current and future demands, while guarding against risks. These are: controlling your debts, protecting your family, saving for a rainy day, planning for later life and investing to make more of your money. Author: Sarah Coles is Head of Personal Finance at Hargreaves Landsdown Brave | Curious | Resilient / www.cicm.com / <strong>March</strong> <strong>2024</strong> / PAGE 19
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