A revolution in the way problem debt is tackled is needed, alongside a new range of financial products specifically designed around the wants and needs of low-income households, a report argues.
Across the UK, around 8.8 million people are over-indebted - meaning they have been at least three months behind with their bills in the last six or they feel their debts are a heavy burden, according to think-tank the Centre for Social Justice (CSJ)
It said that low-income households face the biggest challenges from personal debt, as they often have little choice but to take on high-cost credit such as a payday loan.
At present, people who have struggled with their finances in the past can potentially opt for a "no frills" basic bank account, which will tend to give them somewhere to make payments to and from but no overdraft.
But the report argued that people on low incomes want and need products that are better than what is currently on offer.
It said that they have the same desire for product choice and variety as any other group and so there is a market demand for a new generation of alternative financial institutions specifically designed to serve them.
Christian Guy, director of the CSJ, said: "We need to create a new generation of responsible lenders to offer people an alternative to the dangerous debt spiral many get stuck in. Credit Unions only take us so far.
"This revolution in tackling problem debt should form an important part of the new Government's 'one nation' plan. But our report is also a rallying call to the private sector."
The Future Finance report also said that the Money Advice Service (MAS), a body set up by Government to offer money tips, should create standards to help financial firms, government and other bodies identify signs of financial distress, to ensure people on low incomes get the help they need as soon as possible.
To stop people falling back into debt, funding needs to be directed to debt-related services that can provide after-care following a debt crisis and help people to identify any root causes of their debt problems, such as a lack of numeracy skills, use of inappropriate financial services or deteriorating mental health issues, it said.
The MAS needs to make it easier for customers to use multiple services, such as a crisis face-to-face debt advice service and then an online-based long-term support service, the report said.
The research was funded by JP Morgan Chase Foundation.
Caroline Siarkiewicz, head of the UK debt advice programme for the MAS said: "We strongly support the integration of financial capability and debt advice as the two are mutually reinforcing.
"Debt advisers improve the financial capability of their clients and we believe that strengthening an individual's financial capability can lessen the risk they will become over-indebted."
Mike O'Connor, chief executive of StepChange Debt Charity, said: "There is a clear need for more suitable credit products for those who are struggling financially.
"We have seen the harm caused by products like payday loans that have previously tried to fill this gap, and it is vital to ensure that genuinely affordable alternatives are available for those who are shut out of the mainstream credit market."
He said the reasons behind people's reliance on credit also need to be tackled.
Mr O'Connor continued: "It is vital that the government does more to help low-income families save for a rainy day."
A Department for Work and Pensions (DWP) spokeswoman said: "We are committed to helping people access safe, affordable credit.
"That is why we have invested £38 million in credit unions, so that more people can benefit from the support they offer and have a trusted alternative to expensive payday lenders."