UK families owe nearly six months’ income in unsecured debt

• Family borrowing rises 7% in a year while typical incomes falter
• Number of borrowers falls – but the amount they owe increases
• Having children prompts parents to get their finances in order

Soaring debt and stalling incomes over the last year means UK families now owe the equivalent of more than five times their monthly income in unsecured borrowing, according to new data from Aviva’s latest Family Finances Report.

An annual rise of 7% in family borrowing has coincided with a 1% drop in their net monthly incomes. The typical family owed £11,101 in unsecured borrowing in January 2013 – up by £683 over the last 12 months – but took home just £2,043 after tax: £23 less than in January 2012.

This means that unsecured family debts amount to almost five and a half months’ income – and the situation is even more extreme for certain families. Couples in committed relationships with no plans to have children typically owe 6.4 times their monthly income (£13,149 of unsecured debt vs. a net income of £2,065).

Family income vs. unsecured debts – January 2012 to January 2013
January 2012 January 2013 Rate of growth
Typical monthly income £2,066 £2,043 -1%
Typical unsecured borrowing £10,418 £11,101 7%

Debts increasingly concentrated
While the number of borrowers has actually fallen, those who do borrow are borrowing more. The overall figure of £11,101 is the largest amount of unsecured lending recorded by the Family Finance Report series, with credit cards, overdrafts and personal loans the most common forms of borrowing.

However, while typical credit card debt has risen 18% since August 2012 to £6,055, the number of families using this method of borrowing has actually fallen from 45% to 39%. Over the same period use of overdrafts has fallen from 29% to 26% of families, while the number of families with personal loans has fallen from 27% to 22%.

Fewer families, but more borrowing
Type of borrowing August 2012 January 2013
Families with this credit Typical amount owed Families with this credit Typical amount owed
Credit cards 45% £5,134 39% £6,055
Personal loans 27% £8,555 22% £8,591
Overdraft 29% £4,423 26% £3,955

Parents who are widowed, divorced or separated are the most frequent credit card users (44%). Single parents are the most likely to have an overdraft (34%), personal loan (28%), storecards (19%) or make use of hire purchase (12%).

Having children is motivation to achieve financial stability:
Encouragingly, having young children appears to motivate families to get their personal finances in order. Only 15% of parents took out or extended an overdraft to help raise a young family, just 14% turned to credit cards and 11% to personal loans.

Similarly, while almost half of parents with young families (44%) worry more about their income and finances, fewer than one in five (18%) say it temporarily increased their personal debt and fewer still – 15% – say it had this effect permanently.

Louise Colley, head of protection sales and marketing for Aviva says:

“It is a concern to see family borrowing growing. Inflation and the cost of living are clearly creating financial pressure, but taking on a high level of unsecured debt can leave families vulnerable to an unexpected change in circumstance.

“Thankfully, our research shows that parenthood seems to help people re-evaluate their attitudes to money matters. In fact, almost a third of parents said having children made them assess how they manage their finances. To help them make the adjustment to planning their finances to support a child, Aviva also offers free life cover for all parents until their baby’s first birthday so that family life can begin on a secure footing.”

Aviva’s offer provides £10,000 of free life cover for each parent from the day they apply until their baby’s first birthday (£20,000 if both parents apply). For multiple births the cover is available per child. The cover pays out £10,000 if a covered parent dies on or before their baby’s first birthday. Parents can only take the plan out once the child has been born and before they are twelve months old.