Debt is becoming an ever-more prevalent feature of our personal finances.
Recent figures from the Bank of England showed that UK personal debt grew by 10.8 per cent to £192.2bn in the year to the end of November while research from the TUC found that unsecured debt rose to £12,887 per household in the final three months of 2016. The latter figure was up £1,117 on the final quarter of 2015, representing the highest annual increase in two decades.
Bank of England chief economist Andy Haldane said earlier this month that, as interest rates remain low, there are few worries at this stage about people being able to service this pile of debt.
TUC general secretary Frances O’Grady begged to differ. The increases are, she said, “a warning that families are struggling to get by on their pay alone”.
She is not the only one to think this way, with Money Advice Trust chief executive Joanna Elson noting that soaring credit is “something we should all be concerned about amidst the current uncertainty over the UK economy”.
But why has borrowing reached such high levels and is it actually a problem?
According to Personal Finance Society chief executive Keith Richards there are a “range of reasons” for an increasing reliance on consumer credit, with the Bank of England’s figures revealing “a worrying trend of more and more households relying on credit to fund their day-to-day spending”.
“Record low interest rates make borrowing and the use of credit more attractive, particularly to those who might not otherwise afford the additional spending they are committing themselves to,” he said.
“We are also seeing unprecedented levels of competition between banks, credit companies and car loan providers, who are all offering mouth-watering rates and incentives to attract customers.”
For Elson, the Bank of England's figures, which only cover the period to November 2016, do not even reveal the full extent of the problem, with a mixture of rising inflation and stagnant wage growth seeing increasing numbers of people funding their Christmas through debt.
“The Bank of England’s figures are even more stark when you consider that they only take into account some of households’ pre-Christmas spending,” she said.
“Our research shows that one in three Britons put Christmas on credit and we are already seeing a surge in people contacting National Debtline [which is run by Money Advice Trust] for advice as a result.”
People may be starting to worry about their personal debt in the current climate, but it would only take a small shift in economic conditions to make the servicing of that debt unmanageable for many. As Richards noted, many people “remain vulnerable to sudden changes to financial circumstances”.
“These risks are particularly important to consider given the current level of uncertainty and volatility in the global economy,” he said.
“If economic conditions deteriorate over the course of 2017, households could quickly find themselves in a different financial position, making it harder for them to meet their ongoing commitments.
“Meanwhile, if inflationary pressures escalate more quickly than expected in the coming months, we may well see interest rates rise sooner rather than later, placing a heavier financial burden on indebted households.”
Those who have already taken on debt will have no choice but to pay it back. Anyone who is concerned that they may not be able to do should take action now by contacting one of the wide range of advice services on offer. In addition to the National Debtline, free advice is available from the Money Advice Service or the Scottish Government-run Scotland’s Financial Health Service.
Anyone who is considering taking out credit because they are struggling financially should “think carefully before borrowing money”, according to Ian Williams of the Debt Advisory Centre.
“Think about what the monthly repayments will be and whether you can realistically afford to meet them,” he said.
“Think about how you’d make the payments when interest rates rise or if you were unable to work due to illness. Be alert to the warning signs that your finances are under pressure – for example if you are borrowing money to make existing repayments or if you are borrowing money to pay for essentials such as gas, electricity, your rent or even food.
“If you find yourself in this position, or if you find that money worries are keeping you awake at night, there is plenty of advice and support available.”
Of course advice can only go so far in helping people who are struggling to make ends meet, with O’Grady at the TUC stressing that “unless the Government does more for working people they could end [2017] poorer than they started it”.
With the Government relying on consumer spending that has been funded through debt to support the economy, O’Grady believes it is time the Government stepped up to reciprocate that support.
“There’s a lot the Government could do to help,” she said. “Public sector workers who have suffered severe cuts to their real pay since 2010 are long overdue a decent pay rise. The minimum wage needs to keep rising so the lowest paid workers can keep up with rising prices. And a major programme of public investment in rail, roads, new homes and clean energy could be targeted at communities where decent jobs are in short supply.”
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