Low Income Earners and Debt Traps

Low income earners are one of the most susceptible groups when it comes to debt. Having less disposable income leaves low paid workers open to the temptation of borrowing loans and using credit cards. Falling into a debt traps does not just mean borrowing but can also come about through arrears in rent, taxes, and utility bills.

The Low Income Sector

Britain has a high percentage of people who have a low income. This does not just mean minimum wage employees but also includes part-time workers, single parents, the retired, and students. The reasons behind the debts can vary as can the lengths of the debts. Students are usually recognised to have a high debt level when they leave education but higher paid graduate employment should mean these debts can be paid in less time. Debt can become serious for low income earners when there is very little chance of paying the debt over a short term period.

Factors that Add to Low Income Earner’s Debts

Serious debts gained by low income earners do not just come through borrowing and using credit. A high proportion of low earners live in rented accommodation and rent arrears are a major unseen debt problem. Slipping into arrears is an easy process with many renters racking up thousands of pounds in unpaid rent. Tenants will then usually have to come to a financial arrangement with landlords to pay off the arrears. This type of arrears debt does not only occur with rent but also with council tax and utility bills.

How Much Debt Do Low Earners Have?

An average debt figure for low earners is two and half times their annual income according to the Citizens Advice Bureau. A low earner who earns £7,200 will typically have a debt figure of around £18,800. One in ten low earners will actually have debts from more than 10 different sources. The Citizens Advice Bureau claim that they are now unable to cope with the amount of calls they receive regarding debt.

Low Income Earners and Debt Sources

Low income earners typically have debts spread over more than one debt source. It is not uncommon for those on a low income to have around five different sources of debt including:

• Traditional high street credit cards, loans, and overdrafts
• Door to door high interest lenders
• Loans from friends and family
• Arrears in rent, taxes, and utility bills
• Home shopping debts such as catalogues

Common Debt Traps for Low Income Earners

Apart from rent arrears the most common debts faced by low income earners are high interest rate debts. Payday loans, where money is borrowed and then repaid on payday or an agreed date, and door to door lending traditionally have very high interest rates. Unfortunately these loans along with high interest credit cards are usually the only credit available to low earners. These borrowing methods are also the easiest way to fall into the debt trap cycle. This type of debt trap leads to continual borrowing as the debts and interest payments grow.

The Taking on More Debt Trap

High interest lenders benefit by persuading customers to take on more debt. It is even more beneficial to them if borrowers only pay back minimum payments as this will lengthen the repayment period. High interest lenders prey on those who can least afford this type of debt. Lenders will break repayments down in such a way that repayments look extremely small. In the long term these debts can be huge with mounting interest rates and very high charges for missed payments. This is a debt trap that is extremely easy to fall into and just as hard to climb out of.

The Solution to Low Income Earner’s Debts

Unfortunately an increasing number of low income earners see bankruptcy as the only solution to wiping out their debts. This can be a solution but can have a detrimental impact on future borrowing and might not clear all debts. Another solution would be to make a lower payment agreement with debtors. This can be done by the debtor or through an office such as the Citizens Advice Bureau or the Consumer Credit Counselling Service (CCCS).

For those on a low income the temptation to borrow money to provide for themselves and their families can be hard to resist. High interest credit may look like a viable short term solution but the lender’s goal is to hook people in over the long term. Those in debt should always seek help from agencies such as the Citizens Advice Bureau before falling deeper into one of the many easily available debt traps.