Recent reports suggest there are more people and households in debt now than 10 years ago, and the average household debt is rising.
Debt levels at record high.
Since the financial crisis, a decade ago, average household debt has climbed from less than £3000 to £4000 as the shockwaves are still being felt on people’s finances.
Personal debt levels are at record highs and savers have been enduring a decade of low returns and low growth.
Why have debt levels risen?
There are varying reasons why debt levels have risen. One of the reasons has been the ease of getting credit with the use of credit cards.
Many credit card companies have been offering ever longer interest free periods. 10 years ago, 0% balance transfers lasted 15 months. Today it is 36months.
One analyst says “I’m not sure this is a good thing for all. Some savvy customers have moved balances around and paid little or no interest but others have struggled to repay their debt when their 0% deal ended – so are now being charged 20% APR or more.”
He said it was one reason why personal debt levels have risen. “It’s been easy and cheap money a-plenty over the last decade but paying it back will prove to be a long and costly struggle for some.”
Banks have also changed the way they charge for overdrafts over the last 10 years. They now charge daily or monthly fees and are moving away from charging traditional interest rates making some overdrafts more expensive.
Incomes under pressure
We all know the best way of reducing debt is to pay it off as quickly as possible and resist the temptation of easy credit. However, with interest rates now beginning to rise, what seems like a manageable debt can easily get out of hand. For many struggling households, the option to reduce their debts quickly is simply unrealistic and for many unachievable.
The chief economist at Deloitte’s in the UK has said it would be hard to imagine life without mortgage and consumer credit.
For those who do not have high incomes or large amounts of capital, mortgages are the only way to become a home owner. The use of credit cards is essential for many households to pay for major purchases, such as white goods and furniture. Credit is also necessary for car purchase, in the form of car loans.
This can also benefit the wider economy, since access to credit helps keep households going when incomes are under pressure.
Consumer debt growing.
Consumer debt has been growing since the financial crisis. Car finance has seen double digit growth, students now face more debt and the use of ‘payday lending’ has increased for many households where a payday loan may be the only option.
The main household debt is normally in the form of a mortgage. Mortgage lending accounts for about 80% of UK household debt.
However, since the financial crisis banks have become more wary and selective and mortgage lending has been subdued. Since 2010 net mortgage lending has risen by an average of just 1.5% a year, compared with 10% a year growth in the decade before the financial crisis.
The growth in unsecured credit lending, such as car loans, credit cards and overdrafts has been stronger at 6.7% a year.
The regulators and banks have tightened up on unsecured lending, particularly the car finance market and, subsequently, growth in this area since 2016 has halved.
Mortgage credit is, however, cheaper than it was 10 years ago with the average UK mortgage rate less than half what it was before the financial crisis.
Borrowing on credit cards or using an overdraft is more expensive than it was 10 years ago.
What are the experts saying?
The chief economist at Deloittes went on to say: –
“Events could yet make manageable looking debt burdens unmanageable. A rapid rise in interest rates, and an unwinding of ‘quantitative easing’ would play havoc with consumers’ finances. It is possible to imagine shocks, such as soaring inflation, that might force the Bank to tighten policy more quickly. Or a demand shock, perhaps through a global slowdown or a chaotic Brexit, which would hit household finances and jobs.”
The Institute of Fiscal Studies ‘think tank’ says there are significant areas of vulnerability. It estimates that about 13% of households are under immediate ‘debt servicing pressure.’ This is defined as spending more than 25% of monthly after-tax income on servicing its debts or by being two or more months in arrears with a bill or credit agreement. The young and those on low incomes are most vulnerable. The IFS estimate that 25% of those in the bottom 10% of earnings are under debt-servicing pressure.
According to a National Audit Office report, 22% of UK adults have less than £100 in savings. The report points out that it is those younger and less skilled households, who are also less likely to be working, who do not have the financial resources to see them through difficult times.
Many debt problems today are concentrated in poorer households where low pay and less secure work are an issue. Many of these households need to borrow just to pay for the essentials and household bills.
Experts say this is a set of challenges which extends beyond the provision of regulation of consumer debt.