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04 August 2016

FCA Occasional Paper - Can we predict which consumer credit users will suffer financial distress?

The FCA's latest Occasional Paper looks at the issue of financial distress, how it is related to the use of consumer credit and whether financial distress can be predicted. 

The paper aims to inform discussion about how consumer credit lenders should evaluate whether lending to an individual is likely to lead to financial distress (ie. is 'unaffordable').  The paper reports that the majority (61%) of individuals in Great Britain have at least one consumer credit product and that at any time, one in four people hold outstanding debt.  

Ordering individuals by their consumer credit debt-to-income (DTI) ratio, the report reveals that the top 10% of individuals hold roughly a third of the total debt and have debt levels in excess of 2.5 months of household income before tax.  DTI ratio is a strong predictor of future financial distress, even after controlling for ‘life events’ that may cause financial distress, such as becoming unemployed.

The FCA's findings support the use of the DTI ratio over other measures in affordability assessments, especially for higher-cost products.

Visit the FCA's website to view the full Occasional Paper and the FCA's article: Can financial distress be predicted or is that just life (events)?

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