Unemployed people who have sought ClearDebt’s advice in the last year have seen their average  unsecured debt to take home pay ratio rise sharply in the last year.

In 2009 unemployed people’s average debt stood at 271% of take home pay but, in 2010, it rose to 314%. This is based on a sample of 59,111 of whom 5,059 were unemployed. Retired people were the only other occupational group where the debt to income ratio got worse last year, rising from 252% to 271% (Our sample of retired enquirers is much smaller – only 808 individuals).

Across all occupational groups debt/income has got easier in the last 5 years. In 2005, the average enquirer owed, in unsecured debt only (ie, excluding the mortgage) 199% of their annual take home pay. In 2010 this figure had reduced to 148%. Even amongst unemployed people (and despite last years sharp rise in debt to income ratio), the situation is less bleak now than in 2005, when they owed an average of 327% of take home income in unsecured debt.

The situation is easiest for employed people – who have seen a steady easing in debt to income from 176% of take home pay in 2005 to 120% in 2010. The self employed too have seen their debt to income ratio drop (2005: 247% – 2010: 191%) but are substantially more indebted than those who work for someone else. My advisor colleagues tell me, anecdotally, that the habit of financing their business needs from personal credit cards and loans is one the self-employed find it impossible to give up. Self-employed debt to income did not drop in the last year which may indicate some are finding times tough.

The proportion of our debt enquirers that are unemployed is consistently a few per cent ahead of the proportion one would expect when compared with the UK’s unemployment rate – which is probably no great surprise. I think the sharp rise in debt to income ratio in this group should worry people in government because it also comes at a time when unemployment has risen sharply and looks set to continue marching upward. The chickens may not come home to roost until these people find jobs again but, if and when they do, they are going to be entering employment with a debt burden they will find difficult to service and in sufficient numbers, I guess, to have an impact on any growth we are expecting to come from consumer spending. New and effective debt resolution procedures could make a big difference here.

People with the lowest incomes saw their indebtedness rise last year (2010), unlike every other income group where indebtedness appears to have slowly, but steadily fallen since 2005, according to ClearDebt’s debt worriers’ data (more than 59,000 records of people in debt).

According to data from CreditAction British household’s unsecured debt peaked in 2008 (£9,663) and has declined since (£8,556) – note that the figure is much higher if you eliminate households that have no unsecured debt. CreditAction’s data is the broad pink line in the chart below (and relates to the right-hand axis).

ClearDebt’s data shows that those seeking our advice who had take home incomes of less than £10,000 (per anum) have consistently had a much higher unsecured debt to income ratio than any of the higher income groups. In fact, it’s bobbed around at just under 300% most of the time, apart from 2009 when the pressure eased a tiny bit – and just for a short while.

The data I’ve used this time includes both unemployed and retired people and in my next blog I’ll look at debt to income by different “occupational” groups. I’ve also, at the suggestion of @Chris_Goulden tried to find external data to add context to ours. I Will continue to try to do this and am happy to have suggestions of sources we might use.

In this case, our data and external data show a marked contrast. CreditAction data shows unsecured debt rising over the period 2005-10 as a whole and peaking in 2008. ClearDebt’s enquirers’ data shows a steady decline in the ratio of debt to income – but with a flatter line in 2008. Average incomes in each band have pretty much flatlined over the period too, so the cause of this declining debt to income ratio certainly isn’t that people are earning more.

My feeling, just based on what we know about other aspects of debtor behaviour, is just that debtors are beginning to realise that letting debt fester doesn’t help anyone and that the “take action early” message is beginning to hit home. For me, this even helps explain why the ratio of debt to income isn’t changing amongst the lowest income groups: They don’t have the option of early action, simply because their debt, which will often be from door-step or short term (pay-day) loan providers is always with them – attached to interest rates that you can’t make headway into if you fall behind.

I’ve been looking at a sample of nearly 24,000 debt-worriers who are also home-owners and who approached us for advice between 2005 and 2010.

Home-owners have traditionally often used debt-consolidation as their preferred route for making credit card and unsecured debt more affordable: “The value of the house has gone up – let’s slap the credit cards on the mortgage” (it costs less per month, it might cost more in interest charges in the long run).

Well, in these straitened times, does that still apply? The answer is that things, in some cases may be looking a little rosier – but, for once, it seems the most well-off amongst us may have more to worry about than those at the bottom of the pay scale.

First, amongst our enquirers, average unsecured debt exceeded equity in 2008 and 2009. In 2010, equity rose and overtook debt once more – quite sharply in fact.

Over the period, the average unsecured debt owed by all enquirers has come down too – so there might be room for consolidation in theory. In practice, there isn’t – because the banks aren’t lending to anyone other than their best customers – and people with substantial debts don’t often fall into that category.

We looked at average property values too – arranging the data to show the average property price for each year amongst home owners whose take-home pay fell into 6 bands between <£10,000 and more than £50,000.

Not surprisingly, the less you earn, the less your house is worth. Possibly surprisingly (I really must go and look at some property websites) the properties losing the greatest proportion of their value were those owned by the wealthiest respondents. Between 2005 and 2010, properties owned by people earning more than £50K had declined in value by 13%. Properties owned by enquirers in the lowest two income bands (<£10K and £10-£20K) had actually risen (well only be a per cent or three - but they'd not declined).

The biggest issue, when it comes to using your house as a money-well for debt repayment, is negative equity: If your house is worth less than you paid for it, then debt-consolidation is never going to happen.

I think this issue is particularly significant because, for many years now, the better-off have assumed than, barring the odd hiccup, their house is always going to enable them to turn short term, expensive, unsecured debt into long term, affordable, mortgage debt.

Well, I suspect there is a small crisis waiting to happen here - Higher earners  who have made this assumption may well have increased their unsecured debt, just to make ends meet, over the last year or two, confident their property is going to bale them out.

Well, one in four of them won't be able to.

I was really surprised by the chart above. Every income group except the highest, returned exactly the same result for each year we looked at. In 2010, therefore, 10% of every group except those that earned £50K-plus had a house that was worth less than they’d bought in for. In contrast, 23% of those in the highest income band had lost the ability to use their house to fund their other debt.

“Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

So says Wilkins Micawber in Dicken’s novel David Copperfield. This quote has become so commonly used as a definition of the consequences of debt that it has entered the English language as “The Micawber Principle”.

Well, in the second of an occasional series of short blogs looking at the characteristics of people who struggle with debt, I decided to try to find a simple measure of just how deep in the mire the people who seek ClearDebt’s advice are.

I chose to divide people up by the same take-home pay groups i used in my last blog and to find the proportion that spent more on their ordinary living expenses (not including credit repayments) than they got in their pay-packet every month.

I guess I wasn’t surprised by the general conclusion – that the less you earn the more difficult you find it to make ends meet. But, I was surprised by just how many people spend more than they earn: Amongst people earning less than £10,000, 13% were getting deeper into debt every month. And, amongst those earning £10K-£20K, it was 9%. Even amongst strugglers taking home more than £50K a year there are still some who admit they can’t stretch their pay to meet their outgoings.

Overall,  one in fourteen of the people who asked for our advice were getting into deeper debt every month.

Last time – is debt more common amongst people on the lowest incomes?

Next time – how long could it take people to pay off all their debts?

Using an interactive motion chart, ClearDebt have republished government public data spanning the period 2000-2009 from the Insolvency Service of England & Wales. This multi-dimensional data displays the evolution of personal insolvencies, by IVAs and bankruptcies, by English districts.
UK Insolvency Service Statistics chart courtesy of ClearDebt

This motion chart allows you to select the region that interests you by ticking one or more areas.

Interact with the data by selecting different values for the axis. Modify the size and the colour of the circles to display different information to suit.

For example, to display the volume of IVAs, select from the horizontal axis, the drop down that offers IVAs, then click the play button to visualise the evolution of IVAs in England & Wales for the nine year period.

If you select a specific district from the list, and press play button, a trail will be created for that district showing it’s evolution over time.

The original source data for the chart above is available from the Insolvency Service Statistics.

Embed the chart:

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