Why does debt cause poverty

The differences were equivalent to what you'd see between well-rested people and those who had a night of sleep deprivation. Anxiety symptoms also dropped from 78 percent to 53 percent.

Overall, these results replicated a variety of earlier studies in showing that people function much better with lower debt. The participants also changed their attitude toward money: they were willing to take more risks, think longer-term, and put off rewards today for larger ones in the future.

With that data in hand, the authors explored how total debt relief and number of debts relieved played into the changes. Clearing a single debt was calculated as being equivalent to between 1, and 2, SGD of debt relief when it came to mental function.

In addition, the number of debts cleared influenced general anxiety, while total debt relieved didn't. That doesn't mean that number of debts explains everything. Risk aversion driven by debt seems to be entirely the product of total debt. By contrast, the ability to defer gains for the future is influenced primarily by the number of debts.

There are a lot of caveats to this experiment. The participants come from a single culture, and their selection wasn't truly random: all of them had significant debt, so they may not reflect the general population. In addition, there were no objective standards that determined how each participant's debts were retired—they depended on the vagaries of the individuals working at the charity.

Still, some of the results are dramatic. They suggest our relationship with debt is complicated, with different behavioral impacts from the number of debts and the total debt amount. Regardless, there's definitely some support for the idea that tracking the number of debts takes a toll on people.

And that, in turn, suggests possible interventions, like debt consolidation and a simplified or automatic payment system that keeps the stress in check. A company limited by guarantee, registered in England No. Spread the word:. Follow henrygeorgeuk. Made by. Join our mailing list and receive our email newsletter. Only letters and certain punctuation characters are allowed. Helena St. Confirm Yes Invalid Input. Those who already had greater assets had a greater tendency to reduce their wealth by spending them.

Over and above this influence, wealth varied by only about one-third of the amount that would have been expected based on forecasts of future income alone.

This implies that people who experienced sharp increases in income between and tended to borrow less than could have been justified with hindsight, unless they were already wealthy. Comparing the computed change in wealth with the change in wealth that was actually observed shows these effects from a different perspective.

These calculations assumed that people in poverty borrowed on the basis of plausible forecasts about their future incomes. Some of those expectations were, however, bound to be disappointed: nearly a quarter of households in poverty in would, as a result of borrowing on the basis of the income projections generated, have accrued additional debts of more than 1. These households were predominantly those who remained poor for the period Even then it is not clear that such debt levels are worse than the alternative of not being able to borrow.

Households whose incomes take a long time to recover from low levels run up larger debts than those whose incomes recover rapidly. But the experience of these households does not demonstrate that above-average debt multiples are inherently unsupportable. The broader perspective is that most households in poverty do not remain in poverty for very long.

Figure 3 shows the proportion of the sample below the poverty threshold classified by the number of years between and in which they fell below the threshold. It can be seen that, for most working-age households, poverty was a temporary experience.

The researchers conclude that the welfare of people in poverty would be improved if they had better access to credit on reasonable terms. The Social Fund exists to provide interest-free loans but the amounts involved are small compared with the figures identified here. The time over which credit is repaid is also short.

The advantage of this is that it would make extra credit available at little cost to the taxpayer; the disadvantage is that the collection of repayments on a basis related to income levels would appear as an extra form of means-testing. An appropriate balance between the two would need to be struck. The data were drawn from the British Household Panel Survey and relate to records of households which provided complete data on income and wealth between and and whose heads were aged under 65 in The long-term relationship between poverty and debt Summary Downloads Summary Summary Credit markets exist to allow people to smooth out the effects of temporary fluctuations in their incomes and it is desirable that people should use them for this purpose.

The research, by a team from the National Institute of Economic and Social Research , found: Analysis of the data suggested that people in poverty in tended to have debts relative to their incomes 20 to 25 per cent higher than those of the population as a whole. Borrowing by poor people can be justified by the fact that for most households of working age poverty is only temporary. An analysis of how much poor households might have borrowed if they had been able to respond to reasonable forecasts of future income and borrow on reasonable terms suggests that, between and , households whose incomes rose sharply borrowed considerably less than they might.

This suggests that a key issue in alleviating the effects of poverty is increasing access to credit on reasonable terms. Market rates at which high-income people can borrow are well below those offered by the credit unions which the government sees as a means of providing affordable credit to people on low incomes. The researchers suggest that one way for the government to do this would be to explore a substantial expansion of the Social Fund as a means of improving access to credit by people in poverty.