Occasional Paper No. 20: Can we predict which consumer credit users will suffer financial distress?

People suffer financial distress when they face financial and non-financial difficulties from repaying their outstanding debts. This paper analyses the prevalence of financial distress, how this distress is related to consumer credit use, and whether financial distress can be predicted. We aim to inform discussion about how consumer credit lenders should evaluate whether lending to an individual is likely to lead to financial distress (i.e. is “unaffordable”).

Occasional Paper 20: Can we predict which consumer credit users will suffer financial distress? (PDF 2.27MB)

We have published this Occasional Paper alongside an article Can financial distress be predicted or is that just life (events)?

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Using data from the ONS Wealth and Assets Survey, this Occasional Paper finds the majority (61%) of individuals in Great Britain have at least one consumer credit product and that at any time roughly one in four people hold outstanding debt. Ordering individuals by their consumer credit debt-to-income (DTI) ratio we find the top 10% of individuals hold roughly a third of the total debt and have debt levels in excess of 2.5 months of household income before tax.

Using a narrow definition of financial distress based on arrears, 2% of individuals with outstanding consumer credit debt are in financial distress. Using a broader measure of financial distress we estimate that 17% of individuals with outstanding consumer credit debt, or 7% of those holding a consumer credit product, face moderate or severe financial distress. This is a large number of individuals, approximately 2.2 million. Compared to other individuals, those in financial distress are typically younger, with lower income and higher DTI ratios. They also have noticeably worse self-reported measures of well-being.

DTI ratio is a strong predictor of future financial distress, even after controlling for ‘life events’ that may cause financial distress, such as becoming unemployed. The top 10% of individuals by DTI ratio are much more likely to suffer financial distress than other individuals. And those who hold the majority of their debts in higher-cost products are substantially more likely to experience financial distress than holders of other forms of credit, such as personal loans. Our findings support the use of DTI ratio over other measures in affordability assessments, especially for higher-cost products.


John Gathergood and Benedict Guttman-Kenney

John Gathergood is Associate Professor of Economics at the University of Nottingham.

Benedict Guttman-Kenney works in the Behavioural Economics & Data Science Unit of the Financial Conduct Authority


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