Lower income households turning to borrowing on the rise

The Resolution Foundation has reported that lower income households are twice as likely as high-income households to have increased their use of consumer credit during the coronavirus crisis.

The Rainy Days report, which examines the distribution of wealth across Britain in the run-up to the crisis, and how the crisis is having different impacts on the balance sheets of richer and poorer households, finds that lower income households are also 50 per cent more likely to be saving less than usual, leaving them particularly exposed to the ongoing economic crisis.

The Resolution Foundation says that those most at risk in the crisis have the weakest private savings safety net to fall back on, while the crisis itself is exposing Britain’s wealth gaps, and the ability of low-wealth households to weather the economic storm.

Among the second poorest fifth of households, 32 per cent are saving less than usual, compared to 17 per cent who have increased their savings. One in four of these households have increased their use of consumer credit – most commonly credit cards which carry high interest rates – during the crisis.

In contrast, just one-in-eight high-income households have increased their use of consumer credit, while 34 per cent are seeing their savings increase significantly as their spending falls. The report claims that these very different experiences of this crisis reflect both how focused its negative effects have been on lower-income families, and the big wealth gaps across Britain before the crisis struck.

Rainy Days highlights the need for both a stronger social security safety net, and for policy makers to do more to tackle very large wealth gaps once Britain emerges from the crisis.

George Bangham, Economist at the Resolution Foundation, said: “Pre-coronavirus Britain was marked by soaring wealth and damaging wealth gaps between households. These wealth divides have been exposed by the crisis. While higher-income households have built up their savings, many lower-income households have run theirs down and had to turn to high-interest credit.

“The impact of coronavirus crisis will be with families for many years to come. That’s why it’s important for the government to both strengthen the social security safety net via Universal Credit, and assist more low and middle-income households in building up their private safety nets by boosting their savings.”