Research Paper CPE Research Report
Drivers of over-indebtedness: report to the Department for Business, Enterprise and Regulatory Reform
This report considers trends in household ‘over-indebtedness’ in the United Kingdom (UK) since the late 1990s. A number of indicators and benchmarks of over-indebtedness have been suggested in recent studies. This report finds that measures of over-indebtedness based on actual arrears and defaults seem to be the most pertinent indicators of current household economic and psychological stress, whilst measures of over-indebtedness based on household illiquidity and gearing provide reasonable predictors of the household’s vulnerability to adverse shocks. It shows that self-reported problems of ‘over-indebtedness’ and ‘financial difficulties’ are pervasive, although declining until the mid-2000s. However self-reported problems are not always associated with specific adverse financial circumstances or evidence of arrears, suggesting that trends in self-reported over-indebtedness are partly linked to perceptions fuelled by media coverage and to the household’s own self-esteem and economic stability.
In considering over-indebtedness, the report utilises new empirical evidence for the UK. This evidence is both qualitative, utilising in-depth interviews with several stakeholders in the credit market - including financial providers and debt/money advice agencies - and quantitative, based on analyses from two large-scale household data sets. Using these data, we are able not only to examine the correlates and incidence of over-indebtedness across households, but also, by using both the interviews and the ‘panel’1 aspect of our household data sets, to explore the ‘triggers’ that tip households into potential debt problems.
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