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Problem debt is quickly becoming the “new normal” for millions of families across the UK, according to a major new report by the StepChange debt charity.

The charity’s research found that the changing reality of work in Britain means that millions of people are becoming more susceptible to “income shocks”, leaving many reliant on credit to make ends meet.

A rise in zero-hours contracts, self employment and other forms of insecure employment means that even minor changes in a persons’ circumstances can lead to a ‘damaging spiral’ of problem debt.

There are around 2.6 million people in Britain with severe debt problems, down from 2.9 million in 2013. However, there has been a significant rise in the number of families with children in severe debt – up 16% from 2013 to 750,000.

Low and middle-income families earning between £15,000 to £30,000 a year are the most likely to fall into severe debt, with an increasing number of people in this group finding themselves struggling with debt issues.

Insecure work is exposing a greater number of people to problem debt and income shocks, the report says. 67% of workers trapped on zero-hours contracts experienced an unexpected income shock in the last year.

Self employed people and those on a fixed-term employment contract were also more susceptible to a fall in income, 53% and 59% respectively – compared to just 33% of people in a permanent position.

StepChange says that whilst a more flexible labour market can bring advantages to some people, sudden falls in income will become a regular feature in many people’s lives.

Around 14 million Britons, equivalent to a quarter of the working age population, have suffered at least one income shock in the last year, while 4.5 million have experienced two or more.

According to the research, people with multiple income shocks in the last year are three-times more likely to fall into severe debt than those who experienced just one.

photo credit: NoHoDamon via photopin cc
photo credit: NoHoDamon via photopin cc

The charity warns that a sudden drop in income can be compounded by policy decisions weakening Britain’s safety net. Many of the charities clients were able to rely on personal safety nets in the wake of income shocks, such as personal savings and spare income. But those reliant on welfare benefits, including in-work benefits, said payments were insufficient to meet basic needs following a drop in their income.

Despite recent improvements, real-terms wages are still at 2005 levels, leaving millions of households less resilient to a drop in income. Households have little spare income to help protect themselves from income shocks, says StepChange.

StepChange is calling on policy makers to consider how to help people plug the gap between their income and essential costs in the wake of an income shock. This would help ensure that fewer people need to turn to credit to finance every-day costs, which would place already struggling families at further risk of problem debt. 68% of people who use credit to cope after an income shock fall into financial difficulty.

Mike O’Connor, Chief Executive of StepChange Debt Charity, said: “People have always faced ups and down in their incomes, but the changing nature of work means that income shocks are now a regular feature of more people’s lives.

“These changes may be here to stay and social policies need to reflect the new normal. Our social policy is not keeping up with our economic policy.

“We need mechanisms and safety nets that will ensure that a drop in income doesn’t precipitate a rapid fall into problem debt. People, especially those on low incomes, need more help to build precautionary savings.

“Our welfare system should respond to people’s needs and help them cope with short-term ups and downs so that a temporary change in circumstance does not become a serious and entrenched financial problem.”

TUC General Secretary Frances O’Grady said: “The government must do more to address the growing problem of job insecurity, which this report shows is one of the main causes of problem debt.

“The increase in problem debt not only harms individuals and families but poses a risk to the economy. It should be a warning to the government that we need a wages-led recovery, not a re-run of the events that led to the last financial crash.”