Rising levels of 'problem debt' - but what does that mean?

Last year, 3.2 million households spent more than a quarter of their total monthly income on unsecured debt repayments, compared with just 2.5 million in 2012.

Young people, the self-employed, and low-income families have fared the worst, with many turning to expensive lines of credit such as payday loans to help make ends meet.

Wages nosedive

The findings form part of a report published by the TUC and Unison, who blame stagnating wages for the increases.

They found that of the 3.2 million households that qualified under their definition, half were spending as much as 40% of their gross monthly income on servicing unsecured debts.

Perhaps unsurprisingly, almost two thirds of those were low income households.

The report's authors say that while people have borrowed less and paid back more since the financial crisis, debt-to-income ratios have "remained very high", blaming the decline in real wages between 2007 and 2014.

"Wages might finally be picking up for those in the private sector," says Unison General Secretary Dave Prentis, "but anyone working in health, education, local government and our other public services still has many more years of pay restraint to survive".

Defining the problem

Credit cards can be incredibly useful, giving holders a way to cover large one-off costs over time, or rewarding them for spending they'd have to make anyway.

Indeed, some card holders might find the TUC / Unison definition of problem debt as a little strict - such as those who do all their monthly spending on their cards but then pay them off in full every month.

This definition depends on context: while many people do have a choice in how they take on and service "temporary" debt such as credit cards and overdrafts, many others take on debt to cover financial shortfalls without having a plan to repay it.

Resorting to credit is made even more tempting when card companies are so good at using pester power to get more people to take out credit cards.

But keeping on top of that spending, and the resulting debts, can quickly become a struggle if our financial situation deteriorates.

So in their report on problem debt, the Competition and Markets Authority (CMA) defined it [pdf] as debt "that impacts on the consumer adversely, either because they are unable or struggling to repay the debt itself and/or because it has or potentially will have adverse consequences for them".

Meanwhile the charity StepChange have a checklist approach to defining the issue, helping people identify whether they may be losing control of their debts.

They say that we might have a problem if we do three or more of the following:

• Using credit to keep up with essential bills
• Using credit to keep up with existing credit commitments
• Using credit to last until payday
• Making minimum payments on a credit card for longer than three months
• Falling behind on essential bills
• Regularly facing late payment charges

According to their estimates, around 15 million people in the UK satisfy at least one of these criteria, and nearly three million satisfy three of them.

We've discussed elsewhere how debt can affect us emotionally and physically, and how that in turn can affect those around us.

StepChange have gone so far as to calculate the financial costs of such debt on the whole of society.

What now?

Responding to the TUC report, the charity's chief executive Mike O'Connor, said they had seen "enormous increases" in the number of people coming to them for help:

"In 2014 alone we helped nearly 600,000 people deal with serious debt problems, an increase of 56% since 2012... the average unsecured debt we see is about £15,000."

They've previously called for people with temporary debt problems to be given the same kind of breathing room as those with bigger issues.

That, they say, could help hundreds of thousands of households who face ending up in problem debt because of a sudden financial shock.

Whether that will help the households who find themselves constantly short each month is another matter.

Not helping

The Government say they are determined to get more people into work by reforming benefits - but the problem here is that the working landscape for many consists of low paid jobs and/or zero hours contracts.

They've also announced their intention to introduce a new, slightly higher, minimum wage for those aged 25 and above from next year.

But projections suggest that these workers will still fall short of being able to maintain a minimum acceptable living standard, even by 2020.

Combined with cuts to tax credits and other benefits, it's entirely possible that existing debt problems may even be exacerbated, particularly among low income households.

Whatever definition we use, it's not entirely unrealistic to suggest that the TUC and other organisations will be reporting on problem debt continuing to get worse for some time to come.