Roots of problem debt and policies to mitigate its consequences

This project will, in partnership with the Money and Pension Service (MaPS), investigate how individuals get into debt and subsequently manage their credit commitments, and the effectiveness of debt advice.

MaPS is an arm’s-length body of the Department for Work and Pensions whose objective is to develop and co-ordinate a national strategy to improve people’s financial capabilities.

Why this project is important

At 139%, the UK has one of the highest household debt-to-income ratios in the OECD. Borrowing can help individuals and households smooth their income over time and invest in skills, assets, or future income streams. However, if not managed effectively, it can also trap individuals and threaten their financial stability and well-being.

One of the main policy interventions aimed at individuals in problem debt is the provision of free debt advice. However, the evidence on the effectiveness of debt advice is mainly qualitative or correlational and thus insufficient for the establishment of causal relationships. The research will address this gap by collecting a new dataset, the Longitudinal Survey of Debt Advice (LSDA).  

What it will involve

The research team aims to:

• Understand how individuals and families manage debt and the correlates of problem debt;
• Evaluate the effectiveness of free debt advice for individuals in problem debt;
• Support MaPS and other providers of debt advice to increase the reach and effectiveness of their services;
• Inform the regulatory work of the Financial Conduct Authority;
• Help creditors design policies and practices that protect vulnerable borrowers; and
• Reduce the negative social impact of problem debt.

The project will be completed in two phases:

1. Using the new linkage between Credit Reference Agency and UK Household Longitudinal Study to conduct survival analysis to understand how socio-demographic characteristics are associated with different types of adverse debt events, and to assess the importance of different life events in the emergence of problem debt.
2. Using the new LSDA to:
   • conduct a randomised encouragement study to investigate the effectiveness of encouraging people in problem debt to seek debt advice.
   • examine present-day descriptive statistics of levels of problem debt and perceptions of the effectiveness of different forms of debt advice through a vignette-based survey experiment.

How it will make a difference

A range of outputs will be produced, including a final report, a formal MaPS publication, and policy events with accompanying briefings.