Debt on teesside, research presentation, 15.2.13
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This document summarizes a 2-year research project on financial inclusion and debt in Teesside, UK. The project included household interviews and a mentoring scheme. Key findings include that credit is used to smooth incomes for basic needs and social events. Debt levels are normalized in communities and credit is seen as the only option. Households juggle multiple debts and feel a lack of control over finances. Getting credit enables participation in consumer society and purchasing social inclusion. Alternatives discussed include credit unions and potential caps on credit costs.
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Debt on teesside, research presentation, 15.2.13
- 1. Debt on Teesside: Pathways to financial inclusion
- 2. Debt on Teesside: Pathways to Financial Inclusion • 2-year action research project funded by the Northern Rock Foundation • Partnership between Thrive /CAP and Centre for Social Justice & Community Action, Durham ∂ University • Household interviews • Mentoring scheme • Community campaigns
- 3. Research questions 1. What factors shape and/or constrain households’ financial choices? 2. How effective is mentoring in changing behaviour and attitudes towards managing money? 3. What contribution does engagement in community- based activities have on ∂people’s financial choices? 4. What role can various partner agencies play in developing a coordinated approach to tackling financial exclusion in poor neighbourhoods? 5. What are the key lessons that can be learnt from this project that can be used elsewhere?
- 4. Financial Exclusion Financial exclusion is ‘a state where individuals cannot access the financial products and services that they need’ (Transact 2010: 2). ∂ Lack key financial products: bank account, savings, insurance and pensions High risk: lone parents, the unemployed and those in social housing.
- 5. Credit use in low income Households • Credit is used to ‘smooth’ income and expenditure flows (Dearden et al, 2010; Signoretta,2011) • 69 per cent of low-income households are credit ∂ users (Ellison et al, 2011) • Two-thirds of low-income households have no savings, rising to three-quarters of those in the lowest income quintile (ibid) • Low income households often need small amounts of money to be paid back over a flexible period of time.
- 6. Debt in low income households • Catalogues • ‘Doorstep loan’ companies – APR 1068.50% (‘Provi’, Greenwoods) • Rent to Own companies – e.g. BrightHouse and PerfectHome ∂ • Payday Loans – APR 1,700% – 4, 200% (Wonga). • The Social Fund (Budgeting and Crisis loans) • Informal lending – friends and family • Illegal lending – loansharks
- 7. Price comparison BrightHouse Direct buy (online) Cash price – £632.85 Cash price – £451.85 ∂ Total – £1,613.14 (including *optional service and Price difference: contents cover) *Required for purchase £1,161.19
- 8. Debt on Teesside: household characteristics Age of No. Types of No key households contacts Lone parent 13 18-24 6 ∂ Couple with 6 25-34 9 children 35-44 5 Couple no 1 45-59 4 children Single person 4 household
- 9. Household characteristics Types of No bank Basic Current households account bank bank account account Lone parent 4 8 1 Couple with - ∂ 3 3 children Couple no 1 - - children Single person 2 2 - household
- 10. Credit use by households ∂
- 11. Amount of household debt ∂
- 12. Qualitative findings • Reasons for Credit Use : pathways into debt • Normalisation of debt • Financial Choices ∂ • Control • Self social inclusion
- 13. Reasons for credit use: pathways into debt Major Events Everyday Uses Social norms •Benefit changes •Food •Social occasions – birthday and •Moving house •Energy bills Christmas •Having a baby •Rent ∂ • Acceptable standards of living: •Relationship •Debt repayments - TV and games breakdown - mobile phones - furniture • ‘Cost of living going (new beds for up but income not’ children, sofa, wardrobes)
- 14. Financial ‘choices’ The washer broke and I had no money to buy a new one, so we had to get one out of BrightHouse and that TV over there as well. (Household 8, lone parent, one child) ∂ My daughters needed Christmas presents and it was the only way to get it [money]. The only way I could do it was a Provi loan and [they] came round my house with £400 like that, ‘here you go’ [gestures giving money]. And it kind of deteriorates from there. (Household 15, single man, 3 children living elsewhere)
- 15. Financial ‘choices ' ‘I know you’re paying a lot more [at PerfectHome] you could probably get two wardrobes and a new double bed for that, with mattress, for about a thousand pounds. I know you’re paying over the odds but I don’t have the money to go and buy it.’ (Household 10, ∂ couple, one child) ‘I can afford to pay it weekly. It’s the only way I can do it.’ (Household 9, lone parent, two children) ‘It’s the only option to go to them [doorstep loans] – other than the loan sharks but I’m not that stupid’. (Household 4, couple, three children)
- 16. Juggling debts ‘The reason why we got behind on the council tax is that we were too concentrating on the rent. We skint ourselves one month to pay the rent arrears off...’ (Household 10, couple, one child) ∂ ‘I often miss one or something like that to pay the electric. So it’s just basically I have to miss one out to pay another one and then next time I have to miss another one out to pay another one, because I can’t pay them all off.’ (Household 18, single woman)
- 17. Normalisation of debt ‘[E]veryone is in the same boat’. (Household 4, couple, 3 children, total debt around £3000) ‘I think a lot of people will be in the same boat as me, people round here, the same as what I am’. ∂ (Household 14, lone parent, 4 children, more than £10,000 of debts) ‘It’s not very easy [to borrow money from family] because my mum and my dad and family are all in the same boat as me really’. (Household 17, Lone parent, 2 children, total debt £5000)
- 18. Control ‘Don’t know how much I need to pay back to social [...]They take £9.30 a week from benefits’ (HH 20) ‘One week I’ll, when I go to the bank I’ll have like £140 pound in, oh yeah, buzzing, they haven’t took much off and then another ∂ week I’ll go and I’ll have £89 pound. It’s like a week! It just depends what they feel like on the day I suppose’ (HH 15) ‘they just stopped my money one day and that Thursday till the following Thursday I had to go without, just £47 and it got worse from there kind of thing’. (HH 16) ‘The child tax had got stopped for some reason’ (HH21)
- 19. Self Inclusion • Decisions around money are not merely economic – emotional elements and moral discourses in decision-making. ∂ ‘Why should your kids suffer just because you haven’t got enough money?’ [June 2011 workshop]. • Getting credit enables people to participate as a ‘typical’ member of consumer society. • Purchasing respect and inclusion
- 20. Alternatives? Responsible alternative sector – Credit Unions, Five Lamps. New ways forward? Cap on credit –– Financial Conduct Authority (FCA), will have the ability to cap the costs of credit when it ∂ takes over regulation in 2013 Encouraging saving?– a lack of savings, and lack of experience of ever having any savings, means that borrowing and spending is constructed around not having savings.
- 21. Additional Issues Welfare Reforms – • Cuts to Housing Benefit, ‘Bedroom Tax’, changes to social fund, contributions to Council Tax, Increase in length benefit sanctions ∂ Work in progress by the Institute for local governance found that : • Stockton may lose between £13 million and £20m. • Most affected - families with children some people with disabilities • expectation of rising debt levels amongst claimants.
- 22. ∂ Thank you www.dur.ac.uk/beacon/socialjustice/researchprojects/debt_on_teesside/
Editor's Notes
- The Debt on Teesside project is a two year action research project which developed out of Thrive’s previous work, which found significant problems with debt and high cost credit use in poorer households. It is funded by a grant from the Northern Rock Foundation and run by Thrive in partnership with Durham University. As the project is operating within an ‘action research’ framework it has an explicit focus on bringing about change, both at an individual household level and also collective action for organisational and policy change. The project has developed a programme of household mentoring on money management which will be linked to community-based campaigns arising from issues identified by participants. One of the aims of the Debt on Teesside project is to examine whether on-going support in money matters can help low income households in their financial management more than one off debt advice. Mentors are matched with households and meet monthly, with telephone and text contact between meetings. The role of the mentor is to look at the priorities identified by the household, signpost services and organisations and support positive change, preferably away from high cost credit choices towards more financially sustainable options if possible. The research aims to investigate what factors shape and/or constrain financial choices made by participants and examine the impact of mentoring on behaviour and attitudinal change and choices around money management.
- Before looking at some of the findings, a brief overview of financial exclusion [READ SLIDE DEFINITION] Financial exclusion is an key dimension of social exclusion and a fundamental source of inequality. People experiencing financial exclusion typically lack core financial products such as a bank account, savings, insurance and pensions. Without access to a mainstream bank account people are excluded from: overdraft facilities, discounts associated with direct debits and bank loans at lower interest levels and therefore low income households tend to rely on alternative, and largely more expensive, forms of credit. However it is also that the requirements of lower income HHs are not accommodated within mainstream banking, such as needing to borrow small amounts, ten or twenty pounds for a short amount of time which can be repaid when the wages or benefits come in. particular groups such as lone parents, the unemployed and those in social housing most likely to be financially excluded
- Research of credit use in low income households shows that it is used to ‘smooth’ income and expenditure flows (Dearden et al, 2010) Income is largely static but expenditure is not and seasonal events, such as Christmas, birthdays or the start of the school year bring expenses which cannot be accommodated within a restricted budget. [as recent research shows that... SLIDE –REFER TO] Low income households therefore rarely have the financial cushion of savings But HH, unable to access mainstream credit yet require credit to ‘get by’, income shortfalls are therefore subsidised by using the alternative credit market.
- Unfortunately many alternative credit sources are very high-cost, doorstep lenders and payday loans charge interest rates of more than a 1000% APR. Rent to own weekly payment stores such as BrightHouse and PerfectHome, which sell highly priced household goods and furniture. and catalogues, again offering credit on highly priced goods. illegal money lenders are clearly the darkest side of this non-mainstream credit market. The social fund and lending between family members are also commonly used but are often not seen as debts, as there is no interest as such. Just to give you a quick example of using one source of non-mainstream credit and the disparity between buying the same Hotpoint washing machine directly online and getting one from Brighthouse ...
- [READ PRICE FROM SLIDE ] overinflated cash price from Brighthouse paid over 156 weeks. While the insurance cover is advertised as optional the item cannot be purchased without it unless customers have their own contents insurance and service cover, which the majority of their customers do not. SAY PRICE DIFFERENCE...which is a stark example of the poverty premium that low income households pay... Turning now to the debt on Teesside project I’ll firstly outline some key characteristics of the participating households before moving on to look at their credit use and debts. [make is Hotpoint 11kg AQ113D697E]
- Initial interviews were completed with 24 households. For each household there is a key contact, who is the main link with the research project and provides information about the household. As you can see the majority of key contacts are in a younger age bracket, 34 years or below. Just over half the households are lone parent families, two are headed by lone fathers and two by widows. At the time of recruitment no key contacts reported being in paid work but two did have a partner in paid work. All the other households received income solely from benefits or a mixture of benefits and tax credits. Seven key contacts were on sickness benefits, two were carers; five identified as full time parents.
- In terms of banking, 17 participants had a bank account (but 13 of these were basic bank accounts) which allow for wages and benefits to be paid and in some cases offer direct debits facilities and a debit card but there are no overdraft or loan facilities. 7 participants had no bank account, 4 were female lone parents, 2 were single person households and one was a couple household. According to the Financial Inclusion Taskforce only 3% of the UK population are without a bank account and they’re generally the poorest and most deprived households (2010:2). Now, turning to look at HH credit use....
- We can see that households have a number of credit sources and many will utilize an assortment at any one point as a strategy for maximizing credit. Across a range of 12 credit sources here all households currently use at least two. Thirteen households used four or more sources, of which one household used nine sources. Within these credit sources however, households often had a number of loans or arrangements - for example, three rent-to own purchases, four doorstep loans and a catalogue. One household rather exceptionally reported having 25 doorstep loans. Credit sources from mainstream banking and credit facilities were fewer than those from alternative credit sources and as you can see the social fund and doorstep loans were used by the majority of households. More than two thirds of our participants had a current loan with the social fund and all except one had had a social fund loan at some point. A crucial resource for low income HH.
- Total debt from the participating households amounts to £73,490 (excluding 2 HH which did not know their total debt). The majority of Households had debts of between £1-3 thousand and the next highest proportion had debts between £300 to £1000 but 3 had debts of 10 thousand or more. Most households are not repaying all their current credit commitments and many are being pursued for their debts. For example in the past 12 months: 20 households have been threatened with legal action, 13 have received letters from bailiffs and eight felt that they were being harassed by creditors. Two households have been evicted because of unpaid debts (council tax and rent arrears).
- Looking at some of the findings to come of the project here... Self – inclusion - Credit – a survival strategy and a strategy of inclusion Detail how this is done. Daily needs and consumer products (psy needs/identity/esteem
- divided into three... The findings of reasons for getting credit, leading to debt are divided into 3 here. READ. Major events can either prompt people to get credit, increase credit or hamper the ability to repay – changes to benefits – (can also be bound up with other events such as having a baby change of circumstances, relationship breakdown and so forth or because of losing benefits such as esa and going to a lower level benefit, or mistakes with benefit administration. Ongoing Health issues – was an also underlying factor in many participants’ cases which limited ability to work and also brought additional living costs. Everyday uses – participants were using credit TO GET BY. instant credit services, such as cash convertors, for food. Needs are both social and cultural – people wanted to get their children items viewed as necessary – such as a laptop for a child starting secondary school. When credit payments are taken into account poverty levels are greater than they appear so we can talk about ‘debt poverty ’, spending for daily living and is being spent on debt repayments – participants were more inclined to pay debts which had penalties so gas or rent would be forfeited in order to pay brighthouse or perfecthome to avoid the £5 penalty charge
- As noted earlier the underlying reasons for credit use are trying to get by on a very low income and a lack of savings that could be used before turning to credit. None of our participating households reported having any savings and households therefore either go without, or money has to be borrowed or goods purchased on credit people turned to credit sources when household items broke or needed replacing or for special occasions. It wasn’t a case of profligate spending on expensive holidays and so forth but usually for mundane household items and things for children.
- Generally people were aware of the much higher cost of purchasing goods weekly and many stated that they would buy goods outright if they could afford to, demonstrating that the credit ‘choices’ were not ones freely made. People were using credit sources not necessarily because they chose to but because they lacked viable alternatives. HH 10 – 2 wardrobes HH 9 – articulates the reality that it is not the overall price that is focused on when thinking about a purchase but the weekly amount and whether this is ‘affordable’. A low income limits choice and the choices that are available are at a much higher cost than those of higher income consumers.
- One way in which people would manage limited finances was to juggle which ones would get paid, including essentials like housing costs and bills and it was accepted that some things would therefore not get paid Although deferring household bills in this way allowed participants to organise their limited finances strategically, it was a risky strategy. Eight of the twenty-four participating households had current rent arrears and three had council tax arrears - priority debts which meant they risked eviction.
- Beyond real or perceived need, one reason why people may have taken on credit was that there was a general perception that credit and debt was a normal part of modern life. There is a general perception that most people run up too much debt (23 out of 24 participants). Many friends and family members had similar loan arrangements. This meant that the high cost credit sources used by participants were normalised , they were familiar and unthreatening. The belief that most people have debts, even more debt than them, may be one reason that prevented people accessing debt advice or reducing credit use even when it becomes unmanageable. Among participating households money and debt advice was not sought until people felt they were at crisis point, such as an imminent court appearance or eviction. Worries about debt were generally accepted and lived with.
- It seemed that many participants did not feel in control of finances. There existed quite a passiverelationship in relation to benefits services in which payments and deductions appeared random. This stance often led to a reactive relationship with managing money rather than a proactive one; dealing with things when they happened. The act of things happening to them rather than being in control also occurred in dealings with banks, making payments, late fee charges and credit sources, such as catalogues putting up credit limits. A low and potentially irregular income means organising a budget is even more difficult.
- People can buy themselves some choice and control through credit - Getting high cost credit is not necessarily in people’s long-term financial interest but makes sense in terms of people’s immediate and medium term goals and objectives, most of which are bound up with providing for children within a family or providing for themselves. This includes meeting social and cultural norms and bound up with self esteem and identity. In this way credit use may be seen as a strategy of inclusion. Getting credit enables people to participate as a ‘typical’ member of consumer society. Providing for themselves and more especially their children is a way of negating the negative discourses that surround ‘the poor’ and benefit claimants. Participants can buy their way out of social ‘exclusion’ via the material symbols. They can purchase respect, especially among family and peers. However, the inaccessibility of mainstream (and interest free) credit sources means a reliance on high cost alternatives which unfortunately may impoverish the household further.
- Remember that because of their low income people lack room for manoeuvre. The current local alternatives to high cost credit are being underused by people in poverty. SOME PEOPLE WERE UNAWARE OF CUS BUT THOSE WHO DID KNOW DID NOT USE THEM. In essence this was because people did not feel that the services gave them what they wanted. In essence needing to save to get credit. Also a key problem for Credit Unions is that they have to compete with the more seductive looking high cost credit services. In order to encourage borrowers to use credit unions it is necessary to limit the availability of subprime credit – needs to be a better regulatory framework in Britain. Self-regulation and minor changes will not work. It has been suggested that cap on credit is the way forward. [Greg will talk more about this?] Turning to the issue of savings - People have no savings and therefore no cushion – their lack of savings and lack of experience of ever having any savings means that they construct borrowing and spending around NOT having savings. This has ongoing implications for budgeting and can be one area to address. Very briefly looking at One example is SEED accounts - (Save, Earn, Enjoy Deposits) let clients place restrictions on when they could access their money. SEED clients could set either a date before which or a minimum savings amount below which they couldn’t access their own funds. Another idea is trying to put away money when it comes into the house rather than saving what’s left over.
- Now briefly looking at some additional issues which will negatively impact on HHs in the project and thse in a similar position. Welfare Reforms – Cuts to Housing benefit (under 35 only shared allowance), ‘Bedroom Tax’, changes to social fund,, Increase in length benefit sanctions – all potentially reduce the income of people in poverty further. From 1 April 2013, Council Tax Benefit is being abolished and replaced by Local Council Tax Support – Middlesbrough – 20% contributions to Council Tax for people of working age welfare reforms - Work in progress by the Institute for local governance found that Stockton may lose between £13 million and £20m as a result of the Welfare reforms. The greatest impact will be felt in families with children and sections of the disabled community amongst housing and advice professionals in Stockton there is an expectation of rising debt levels amongst claimants.