CHILDREN in debt-burdened families are suffering extra trauma as the financial stress puts pressure on domestic relationships, a new report suggests.

The Debt Trap, a report by the Children's Society and the debt charity StepChange, and backedby the Archbishop of York, Dr Sentamu, looked at the situation of the 2.5 million children in families with problem debt, and a further five million in families that were struggling to keep up repayments.

It found that those in families with problem debt were more than twice as likely to be unhappy at school, and be bullied because they did not have the same things as their friends.

Half of those questioned said that problem debt caused arguments in the family, and more than half (58 per cent) worried about their family's financial position. Nine out of ten families in problem debt could only keep up repayments if they cut back on essentials such as food, clothing, or heating.

The report also found that more than half of children aged ten to 17 saw advertising for loans either "often" or "all of the time"; but only one in five learned about money-management at school.

The chief executive of StepChange, Mike O'Connor, said: "This report is a stark warning to policymakers, creditors, and the wider society of the devastating effects of debt on children. The sad reality is that, for many parents, credit which is often unsustainable has become the only way to cover their essential household bills.

"As parents become trapped in a toxic cycle of debt, children can become the unwitting victims."

The report's findings are based on a survey of 2000 families with dependent children; another survey of 4442 adults; 15 in-depth interviews of parents with children facing problem debt; and a focus group of young people.

The charities have called for changes in how creditors treat families with children who fall behind on bills. They say that the Government should review protection for children in the light of the harm caused by debt collection, and consider a "breathing space" scheme, providing an extended period of protection from additional charges, interest, and enforcement action.

Local authorities should have a debt-collection strategy that acknowledges the impact on families with children, and regulators should make sure that creditors have "early warning systems" to alert them to problems and offer advice and support.

"When the monthly struggle to pay the bills becomes too much, often families think they have no option but to borrow money to provide the basics for their children," Dr Sentamu said. "We need to make sure families living in poverty have somewhere to turn other than to usury lenders."

The chief executive of the Children's Society, Matthew Reed, said: "We cannot allow children to pay the price of debt. This research exposes the shocking reality of parents' lying awake at night worrying, and unhappy children going without."