Life happens but we’re not financially resilient
17 July 2019
7 in 10 people who experience debt do so due to a life shock: gaps in coping mechanisms need an overhaul, but how?
Around 23 million people have experienced a life shock in their household in the past two years. New research from StepChange Debt Charity finds that people who had experienced a life event in the last two years were three times as likely to be in problem debt than those who had not. This points to the need for a radical overhaul of protection mechanisms against life events.
- The more life events people experience, the more likely they are to be in debt
- The more coping strategies people use, the more likely they are to be in debt
- People with children, of working age, and on modest incomes are all at higher risk of life events pushing them into debt
- A collaborative rethink involving policymakers, businesses and creditors is needed to improve protection against the financial risks that come with unforeseen life events.
StepChange’s new report marks the first stage of a major project designed to unpick the nature of the financial coping mechanisms that people try to use when unexpected life events happen, understand why they are not necessarily effective in helping people avoid problem debt, and constructively identify what needs to change.
Commenting on the first stage findings, StepChange CEO Phil Andrew said:
“This research really brings home the reality that most debt problems are triggered because of unexpected events in people’s lives. For individuals these are unpredictable, even though within society as a whole we know that such events are common.
"Dealing as we do with over 600,000 people a year facing financial problems, what we see being played out time and time again is that current mechanisms are just not proving effective in keeping people out of financial harm when life events do happen to them.
“The scale of the problem demands a coordinated approach. We know that many people, even those who are in work, are finding it hard to build up any level of protection against these common life shocks.
"We need policymakers to prioritise this issue and we want to work with them, and others, to identify how support can be improved to break the link between life shocks and problem debt.”
Currently three million people are in problem debt in Great Britain, with another 9.8 million showing signs of financial distress [see notes 2 and 3 to editors]. In 2018, seven in every ten people who came to StepChange for advice said the primary reason they had got into problem debt was because of a life event or shock. Identifying “what works” in helping people cope after a life shock should therefore be a policy priority.
There are gaping holes in protection, and to build financial resilience requires a rethink of mechanisms to protect against and manage the financial consequences of life events such as birth, death, relationship breakdown, illness, caring responsibilities and fluctuating employment.
A YouGov survey [see note 2 to editors] finds that not only did just one life event increase the likelihood of being in debt, but also that the more life events people experienced, the more likely they were to be in debt.
People rely on a wide range of coping strategies to try to avoid debt when they experience life events. Collectively, these are failing. Few people have been able to save effectively, the tightening of the benefits system has reduced the scope of welfare safety nets, and large scale private sector solutions have not really emerged to fill the gaps.
Applying for benefits; borrowing money from family and friends; using credit cards, overdrafts or high-cost credit; relying on statutory pay (suck as sick or maternity pay); cutting back on expenditure: these were all strategies that people used, but that did not necessarily result in them avoiding debt problems.
Dave and his wife were both in full-time employment until she was diagnosed with cancer and he was diagnosed with kidney disease, that eventually led to sepsis. They were both forced to stop working, leaving them reliant on £20,000 in savings. Sadly, Dave’s wife passed away soon after her diagnosis, leaving him to support himself and their two sons alone.
"After my income began to go down, we had credit cards, and a bit of savings which we were using up. We’d saved beforehand, but that soon dwindled away. I was using the credit for food and clothes quite often. We managed to get a council tax reduction and we got grants off Macmillan to help us with the gas and electricity, which went some way towards it, but the rest we had to pay ourselves.
"I contacted StepChange because it got too much to handle myself. It was just a downwards spiral. It was just getting to the end point where I thought ‘I can’t take this anymore, I need to do something about it."
What is striking is that when people are using multiple coping mechanisms, this often seems to be associated with higher incidence of debt. This suggests that people may be desperately seeking support from a range of sources but finding this is ineffective. The more coping strategies people use, the more likely they are to be in difficulty.
For example, among those using five or more of the commonly used strategies, 32% were in problem debt – four times as high as the 8% among those using two coping strategies, and just 1% for those using none. Among those using five or more strategies, another 42% showed signs of financial distress [see note 2 to editors for definitions].
The findings raise obvious questions about the effectiveness of the welfare system as a safety net, but also suggest that businesses, creditors and employers all need to do more to build in more financial resilience to their products and processes.
StepChange says collaboration is needed to understand what the characteristics are of people who do cope effectively with life shocks that put them into that position, to enable these to be replicated more widely. The next stage of the charity’s research will delve into trying to better understand “what works”.