More than a million families with a household income below £30,000 are in extreme debt fuelled by a collapse in the value of wages, according to Trades Union Congress (TUC).
The new report by TUC and Unison has found that 1.6 million households are in ‘extreme problem debt’, paying out more than 40% of their gross household income on unsecured debt repayments.
One in eight households are in ‘problem debt’, paying out more than 25% of their gross household income on unsecured debt repayments.
TUC said that ongoing wage stagnation is making the problem worse, with many low-income households under particularly severe pressure.
Bank of England figures show that consumer credit, which makes up the main part of unsecured debt, is now growing at an annual rate of 10%, the highest growth rate for more than a decade.
The report found that total unsecured debt, which excludes mortgages, for UK households rose by £48bn between 2012 and 2015 to reach £353bn.
Frances O’Grady, TUC general secretary, said: “Families can’t continue relying on credit cards and loans to get by. But with the average weekly wage still worth £40 less than before the 2008 crash, lots of families have little choice.
“Higher wages must be at the heart of the government’s economic plan. We need a return to proper year-on-year pay rises, and a higher national minimum wage and we need public investment in major infrastructure projects to create more well-paid jobs and build a stronger economy”.
TUC reported that the debt has been fuelled by a collapse in the value of wages, with Organisation for Economic Cooperation and Development (OECD) figures showing UK wages declined by 10.4% between 2007 and 2015.
The figures show that although household debt had not growth ever year and is yet to reach pre-crash rates, the fall in the real value of wages has made it harder for families to service existing debt.
Mr O’Grady added: “The government must also do more to help low-income families struggling with problem debt in getting access to debt restructuring and insolvency support.”
For low-income households in employment, extreme problem debt is growing fast. In 2015, 9% of low-income households in employment were in extreme problem debt, nearly doubling from 5% in 2014.
Dave Prentis, Unison general secretary, said: “Many of those affected by debt will be public service workers who have suffered eight years of zero pay rises, followed by a government imposed cap on earnings.
“This report rightly draws a link between increased debt and stagnant wage growth at a time when rent and transport costs continue to rise. Many families are having to make choices between paying the rent and feeding their kids.”