Applied Financial Economics,2008,18,1209–1220
The impact of unsecured debt on financial pressure among British households
Ana del Rıo a,*and Garry Young b
a Departamento de Estudios Monetarios y Financieros,Banco de Espan˜a, Alcala´48,Madrid28014,Spain
b Monetary Assessment and Strategy Division,Bank of England, Threadneedle Street,London,EC2R8AH
This article uses the1995and2000waves of the British Household Panel Survey to examine how a self-reported indicator of financial pressure is related to household finances and other http://doc.xuehai.neting an ordered-logit model we find that the burden of debt is affected by the unsecured debt-income ratio,mortgage income gearing,financial wealth,health, ethnicity and marital status.
UK households accumulated debt very rapidly from the middle of the1990s.This was accompanied by evidence of increasing difficulty in servicing debt among a minority of the population;for example,the bankruptcy rate rose almost four-fold between1995 and2005,albeit from a very low base of about5in 10000of the adult population.
Bankruptcy is an extreme response to the financial pressure that some households experience as a consequence of taking on debt.While debt may result from inter-temporal substitution of consump-tion over the life cycle that improves household welfare,the legacy of debt is that future spending must be lower than otherwise.As a consequence it is likely to be considered a burden by households even though they may not regret the decisions that generated it.
We investigate the factors which determine whether debt is considered a problem and whether the importance of those factors changes over time.Our focus is on problems with unsecured debt,consisting mainly of overdrafts,credit cards and personal loans. While the majority of household debt in the UK is in the form of mortgages,the majority of debt problems are associated with unsecured debt,fundamentally because it not backed by an asset that can be sold or re-mortgaged when difficulties arise.1
We use attitudinal evidence from the British Household Panel Survey(BHPS)on the extent to which households consider unsecured debt to be a burden as a measure of financial pressure and use an ordered-logit approach to assess how this is affected by the amount of outstanding unsecured debt and other possible determinants.2The empirical analysis is carried out for1995and2000,the only two waves of the BHPS available to us that contain information
1The Insolvency Service estimates that only around10%of bankrupt individuals have secured debt arising from mortgaged property.Similarly,around two-thirds of the debt clients of Citizens Advice Bureaux are tenants and so without mortgages (Citizens Advice,2006).
2The BHPS is managed by the ESRC UK Longitudinal Studies Centre with the Institute for Social and Economic Research at the University of Essex.The BHPS is an annual national survey whose sample has remained broadly representative of the population.The BHPS sample excludes households located north of the Caledonian Canal in Scotland.The sample we use excludes new samples that were included in BHPS since1997.Detailed information can be found in Brice et al.(2002).
Applied Financial Economics ISSN0960–3107print/ISSN1466–4305onlineß2008The Bank of England1209