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‘Life shocks’ increase risk of falling into problem debt

Coping strategies such as borrowing money or relying on sick pay aren’t working

People who experienced a life event such as birth, death, relationship breakdown, illness, caring responsibilities or fluctuating employment in the past two years are three times more likely to be in problem debt than those who did not, a survey shows.

The research from debt charity StepChange reveals around 23 million people have experienced a life shock in their household in the past two years. 

Currently three million people are in problem debt in Great Britain, with another 9.8 million showing signs of financial distress.

In 2018, seven in every 10 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.

The charity has called for a rethink of the mechanisms to protect against and manage the financial consequences of life events.

The YouGov survey found 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, such as 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); and cutting back on expenditure.

The research reveals that 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.

The charity said the findings raise 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 chief executive Phil Andrew argued that the current mechanisms are proving ineffective in keeping people out of financial harm when life events 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,” he said. “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.”

Becky O’Connor, personal finance specialist at Royal London, warned that life can be full of knocks which can have a massive impact on our finances.

“Given that for most of us, life will not always be a bed of roses, it’s a good idea to expect the worst when it comes to finances and prepare – as much as you can – accordingly,” she advised.