Debt is a problem for a quarter of the poorest UK households

[LONDON] One in four of the lowest-income households in the UK is struggling with debt, according to the Institute for Fiscal Studies.

Sixteen per cent are in arrears on unsecured borrowing and other bills and a further 10 per cent are spending more than a quarter of their income on repayments, the London-based think tank said in a report published Tuesday.

The rapid buildup of credit has been a source of concern for Bank of England financial-stability officials, with the amount owed on credit cards and other unsecured loan agreements now estimated at more than 200 billion pounds (S$364 billion). There have been warnings that struggling families are turning to debt to make ends meet as wages fail to keep pace with rising prices.

But the IFS cautioned against overstating the scale of "problem debt," saying that 60 per cent of unsecured debt is held by households with above-average incomes and more than half of households have more than enough financial assets to clear their liabilities.  "While debts can be a sign that a household is struggling to manage its finances, they can also be an appropriate and manageable response to negative shocks or an anticipated income rise," IFS economists Andrew Hood, Robert Joyce and David Sturrock wrote in the report. "It is important for policy makers looking to address 'problem debt' to distinguish between these different possibilities, based in part on the wider economic circumstances of households." Debt distress is most pronounced among the poorest 10th of households, but those on low incomes are also less likely to hold any unsecured credit, their analysis found.

BLOOMBERG