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Lower income households turn to borrowing in coronavirus crisis

Lower-income households are twice as likely as high-income households to have increased their use of consumer credit during the coronavirus crisis, according to a new report.

Rainy Days was published by the Resolution Foundation, an independent think-tank focused on improving the living standards for those on low to middle incomes, in partnership with the Standard Life Foundation, an independent charitable foundation. The report examines the distribution of wealth across Britain in the run-up to the coronavirus crisis, and how the crisis is having different impacts on richer and poorer households.

The report shows 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.

A typical worker in a shut-down sector of the economy – and therefore most at risk of unemployment – had average savings of just £1,900, far less than the average savings (£4,700) of someone who has been able to work from home during the crisis.

Looking at the impact of the crisis on households across the income distribution, the report finds that lower-income households are far more likely to run down their savings and turn to high-interest credit.

Among the second poorest fifth of households, one-in-three (32 per cent) are saving less than usual. 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.

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 the 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.”

Credit Union Chief Executive Martin Groombridge added: “This report highlights yet again just how precarious the financial situation is for lower income families in this country. A lack of savings means that, for many, a reduction in income can cause serious problems, as people turn to high cost credit just to get by.

“Credit unions like ours provide safe savings and affordable credit at times of need and we would urge people to talk to us if they have money worries. We would also urge policy makers to do more to provide a stronger social security safety net for those on lower incomes, and to tackle the glaring wealth gaps across Britain, especially in London.”

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