The pandemic has changed the personal finances of millions of people across the UK. Paul Das, debt insight manager at the Money and Pensions Service (MaPS), explains how we have adapted the way we measure the need for debt advice to address the changing landscape of problem debt in the UK.
We can all agree that there are a number of complexities to debt advice, and different approaches to working with clients. Debt advice has to be provided in a way that is personalised to each client, and that takes into account the situation that clients present with. Providers also have different approaches to the advice process. All of this helps shape different views about how the need for debt advice should be measured.
To plan for the future, we needed a new way to measure the need for debt advice that identified people who show early indicators of problem debt, and that could be tracked over time.
How we predict the demand for debt advice
In response to this, MaPS commissioned an external literature review to look at published research on early indicators, particularly the socio-economic precursors and behavioural indicators that help predict the need for debt advice. We were encouraged to find that many of the these indicators are the same as those we collect in our annual Debt Need Survey of 22,000 UK adults, such as being in arrears and using high-cost credit. We also found that other questions asked in the survey covered issues that influenced the need for debt advice. We are now confident that we have the right building blocks to create a new early warning measure to predict demand for debt advice.
A new way to measure the need for debt advice
Our new Need for Debt Advice measure, derived for each person who took part in the Debt Need Survey, was developed using statistical analysis of the key questions that the literature review told us were important:
- regularly being behind with bills and credit commitments
- arrears with both priority and non-priority debts
- adverse events (such as legal action or contact from bailiffs), and
- use of high-cost credit.
What’s changed?
We’ve moved away from questions about how much of a burden it is to keep up with bills. This is a subjective measure and not a particularly reliable measure of whether someone needs debt advice.
Intuitively you would expect a high debt to income ratio to be an important predictor of problem debt and this was confirmed by the literature review*. The breadth of arrears that we collect in our survey is a good substitute for this. In addition, the different debts that we identify have more or less severe impacts on people.
We have now created a graduated measure of the need for debt advice instead of a binary “need advice/don’t need advice”.
* Multiple references to this ratio were found in the literature review including several studies conducted for the Financial Conduct Authority (FCA)
Where do we draw the line for needing debt advice?
Our new measure categorises people into six groups with increasing financial difficulties. We profiled these groups with measures that we have used in the past to see how well they overlapped. Finally we conducted statistical tests on the groups using a wider range of questions from our survey. This is what we found:
| Group | Key characteristics | Need for debt advice |
| 1 | People with minimal financial difficulties. Despite everything that has happened, still the biggest group | No signs of needing advice or guidance |
| 2 | Like Group 1 but some signs of concern such as borrowing from friends and family and making minimum payments on credit cards | Would benefit from money guidance via the MoneyHelper website or other sources |
| 3 | This group have early indicators of problem debt– starting to build up arrears including a few with priority debts* | At a tipping point and need to seek guidance before their situation worsens. |
| 4-6 | Strong indications of needing debt advice. Currently behind on at least one priority bill, facing early or late-stage creditor action and using credit to pay for essentials | Definitely need regulated debt advice |
* Priority debts have serious impacts such as disconnection of gas or electricity, losing your home etc.
Who will the new debt advice clients be?
So who are the people in Group 3 who show early indicators of needing debt advice? With two thirds of the interviews from our 2021 Debt Need Survey completed, this is what we know already.
Young people, furloughed employees and low-income households
Some are the people negatively impacted by the pandemic which our head of insights discussed in his blog:
- They are young (a quarter under 30 years old), and half live in households with a total income of less than £20,000 per year
- A quarter have been furloughed during the pandemic.
The profile of new clients
There are some differences between them and advice clients that providers are used to dealing with, however:
- They come from a range of different backgrounds, including degree-educated people
- They include homeowners, private and social housing tenants
- Most are in permanent full-time work, but 7 out of 10 told us that they don’t have money available to pay bills when they arrive at least some of the time.
New clients’ propensity to seek debt advice
It can take people months or years to reach out for debt advice, but one in ten of this group tell us that they have already contacted an organisation about debt advice. Another quarter say they will take that step if their situation gets worse.
Financial position of new clients
This is their financial position currently:
- Half are addressing the mismatch between income and outgoings using high-cost credit ranging from unauthorised overdrafts to payday lending
- 8 out of 10 have arrears, but this is mainly one or two debts rather than a bigger range of arrears – at least for now.
Every client is unique, and some may be able to improve their situation, but for at least some a few missed payments could have a dramatic impact.
Find out more
Early next year we will publish our new measure updated using the 2021 Debt Need Survey. The potential changes to the UK economy and phasing out of Covid-19 support and forbearance mean that we need more frequent updates, and so we will start to track the measure quarterly through 2022-23.
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