Millions of Britons are facing an affordability squeeze as consumer debt is forecast to increase faster than income over the next two years.
A report by credit scoring company Aire revealed half of the UK’s population holds some form of consumer credit, but less than three in five (59 per cent) people show good signs of financial maturity.
Almost a third of credit card and personal loan debt - up to £35bn - is sitting with people who are deemed to have low financial maturity, the company said.
In addition, up to £20bn of credit card and personal loan debt in the UK is held by people who have had to dip into an unauthorised overdraft over the past 12 months.
The news comes as wage growth fails to keep pace with the rate of inflation, pushing up the cost of living.
At the same time, the likelihood of interest rates increasing appears to be growing – a move that would increase the cost of servicing debt.
The report revealed freelancers, the self-employed and gig economy workers often find it hard to gain credit as they are not able to fulfil traditional credit assessment metrics.
Freelancers have only increased their credit card and personal loan debt by £399 over the past two years, compared to a national average of £548.
More than half (56 per cent) of freelancers show good signs of financial maturity, and they are planning to take out an average £331 in credit card debt and personal loans over the next two years.
During the past two years, people with children increased their credit card and personal loan debt by £566, compared to only £538 for those living without children.
Those in low-income employment experienced the biggest increase in credit: while the national average was £548, people in households with an annual income between £15,000 and £20,000 increased their debt by £700.
The findings are based on a random sample of 2,095 UK adults aged 18 and over who were interviewed by Populus between 22-23 May 2017.
Aire’s founder and chief executive Aneesh Varma commented: “This affordability squeeze means that even if some people manage to pay down their debt, they will have to make drastic cuts elsewhere and face financial distress in the process.
“This hurts the economy in multiple ways beyond the financial services. We can get ahead of this by enhancing credit assessments across the ecosystem by deepening our understanding of an applicant’s capacity and character.”
Daniel Bailey, principal at Derbyshire-based Middleton Finance, said: “My main concern is with the car finance side of things. I know of young first-time buyers who, when I’ve explained how much they can borrow, are surprised; and I say ‘you have this car sat on the drive and you are paying £250 a month on it’ – and they explain how easy it was to get the car. That has an impact on them getting a mortgage.