Welcome to the January 31, 2020 edition of the Fair4All Finance “Research Round-Up”. This is where we summarise some of the recently published reports and academic papers that the team has been reading. Please email hanadi@fair4allfinance.org.uk with any reports or papers that you want us to consider for the next one!

Recently published reports

Living Without: The Scale and Impact of Appliance Poverty

Turn2Us Living Without Campaign, January 2020

The Living Without campaign highlights the true scale and impact of appliance poverty (i.e. living without essential household appliances such as fridges, freezers, cookers and washing machines) in the UK. Researchers find that over two million households—4.8 million people—are living without at least one essential domestic appliance. This is alongside a considerable number of households living with broken or faulty goods. While the national scale is staggering, certain demographics are considerably worse affected than others, such as:

• Private renters;
• Households on incomes below £10.000;
• People living in London, West Midlands, North East England and Yorkshire and the Humber;
• Self-employed people; and
• Single adults

The report breaks down the consequences of living without an essential appliance into three broad categories: (1) financial, (2) physical, and (3) emotional. First, researchers find that living without a cooker or fridge/freezer can translate into a 50 per cent or 43 per cent increase in food expenditure, respectively (£2,100 or £1,365 added to a yearly average family’s food bill). This can have severe implications for the financial well-being of low-to-middle income households. Second, research illustrates that families living without a cooker or fridge/freezer heavily rely on pre-packaged foods, which can have a series of negative health consequences. In addition, for those with illnesses and disabilities, living without a washing machine can result in an aggravation of their physical symptoms because standing for long periods of time or washing their clothes with their hands. Third, researchers demonstrate that people living without an essential household appliance have a lower life satisfaction, feel less worthwhile, are less happy, and have more anxiety. This can result from stress of not being able to provide for family members, or the anxiety of smelling unclean.

The report concludes by setting out a series of recommendations to help get a fridge, freezer, washing machine, and cooker into every home. These recommendations include bolstering Local Welfare Assistance schemes, launching a Select Committee Inquiry in Local Welfare Assistance schemes, and promoting new financial tools and products, among others. Read the full report >>

An Outstanding Balance? Inequalities in the Use and Burden of Consumer Credit in the UK

Jubair Ahmed and Kathleen Henehan, Resolution Foundation, January 2020

This report outlines the inequalities in the use and burden of consumer credit in the UK. Following concerns raised by policymakers and press about rising household debt levels prompting an “imminent” recession, recent evidence has suggested that these worries are largely exaggerated. The total value of household secured debt relative to disposable income today (97 per cent) is certainly higher than in 1994 (62 per cent) but is substantially lower than during the financial crisis (110 per cent). Moreover, secured debt has become less costly, as there has been a considerable reduction in average quoted mortgage rates (interest rate on a ten-year loan is at 5 per cent, down by half from 2010). However, the report highlights that the distribution of unsecured consumer credit has severe implications for low-to-middle income households. Thus, despite reductions in the level and cost of household debt, policymakers should still focus on the spread of consumer debt across the population, and specifically the extent to which low-to-middle income households are exposed.

Researchers find that between 2006-08 and 2016-19, the rise in the proportion of households using consumer credit (including high-cost credit) has been greater for lower-income households than it has for both middle and higher-income households. Therefore, it is unsurprising that, relative to their incomes, lower-income families remain significantly more exposed to consumer debt than their higher-income counterparts. In addition, research indicates that lower-income households are less likely to access lower-cost credit, and that one-third of lower-income households are “putting off spending” because they are concerned they won’t be able to access credit when they need it. This growing level of financial fragility can have severe effects on the lives of lower income populations, as evidence shows low-income households with outstanding consumer debt tend to experience more financial stress than both their counterparts in the bottom income quintile who do not have any outstanding consumer debt and those in higher income quintiles who do. In addition, fewer than one-in-three (32 per cent of) lower-income households with consumer debt do not feel they have enough money set aside for emergencies, as compared to 42 per cent of those in the third income quintile that have consumer debt and 65 per cent of those at the top. Read the full report >>

Data Sharing in Credit Markets: Does Comprehensiveness Matter?

Giovanni Barci, Galina Andreeva, and Sylvan Bouyon, European Credit Research Institute, August 2019

This report examines whether higher comprehensiveness in data (both traditional and non-traditional) provided by Credit Reference Agencies (CRAs) can impact credit markets in the EU-28. In particular, researchers assess whether data comprehensiveness can impact on a number of macroeconomic indicators, namely (1) financial inclusion, (ii) financial intermediation (allocation of consumer deposits to credit activities, or supply of credit), and (iii) the risk of missed repayment. This brief discusses the results for indicators (i).

Financial inclusion is measured by the consumer credit to GDP ratio, and the share of population which has taken credit in the 12 previous months (divided according to the level of income: the 60 per cent richest and the 40 per cent poorest of population in each country). Findings show that with more detailed information, creditworthiness assessment outcomes could change for some consumers—consumers can be considered less likely to default than initially predicted or more likely to default than originally anticipated—which can boost or reduce lending. Overall, the evidence revealed that lending increased with more comprehensive data for both low-income and high-income populations. Additionally, researchers highlighted evidence that the inclusion of non-traditional data (i.e. rent and utility payments and banking transactions) and unstructured data (i.e. mobile phone use web browsing, and psychometrics) can offer value to both lenders and borrowers. Researchers illustrate the main benefit of using non-traditional data is to increase the predicative accuracy of credit risk models, to increase financial inclusion, and to offer a fair and holistic view of the customer. It is important to note that this evidence of non-traditional data largely comes from developing countries, where a lack of traditional shared credit data is a known obstacle for individuals in getting access to finance. Researchers from the ECRI conducted qualitative interviews with eight relevant stakeholders in the EU to draw parallels with the EU context, but robust research in this field is still lacking. Read the full report >>

Published academic papers 

Credit Smoothing

Sean Hundofte, Arna Olafsoon, and Michaela Pagel, NBER Working Paper Series: 26354, June 2019

This paper investigates how credit card and overdraft borrowing responds to a transitory income shock following unemployment. This research employs detailed longitudinal information on debit and credit transactions, account balances, and credit lines in both Iceland and the United States. Researchers find that over the average spell of unemployment, individuals reduce their spending, rather than increase their consumer debt holdings substantially, even if they borrow regularly and have sufficient liquidity. More specifically, researchers find neither an increase in the likelihood to have an overdrawn checking account nor in the number of overdrawn accounts, during unemployment. This is in contrast with standard economic theory, which states that unsecured high-interest, short-term debt—such as borrowing via credit cards and bank overdraft facilities—helps individuals’ smooth consumption in the event of transitory shocks. Thus, the empirical evidence concludes that households allow consumption to adjust while smoothing their debt balances and thus document an important discrepancy between theoretical and empirical results. This is relevant, as researchers highlight half of all individuals overdraft their checking account on average in any given month, however, this does not seem to be driven by unemployment, as was previously believed. Read the full paper >>