Are we on the verge of a household debt crisis?January 24, 2017
Britons are loading up their credit cards, taking out large personal loans and diving deep into their saving pots.
New Bank of England data shows personal debt is skyrocketing and has reached a new post-credit crunch high of £192.2bn and is growing a faster each year.
While a sharp increase in credit card usage and personal loans might appear to preface a looming financial disaster (especially considering the role consumer debt played in the infamous collapse of Northern Rock), not everyone agrees.
In this blog, we dig down into consumer debt and discuss whether you should be concerned about our debt-laden financial landscape.
Should we be worried?
With the increase in household debt far outstripping wage inflation and recent borrowing decisions based on historically low interest rates, many are worried that households will be unable to cope when interest rates do inevitably rise.
What is affordable right now (the Bank of England’s base rate is set at 0.25% — the lowest it's ever been) may not remain so if interest rates were to rise back to levels seen during 2006 (4.5%), 1996 (5.68%) or 1986 (9.87%).
Chief economist at the Bank of England, Andy Haldane, tried to calm fears, saying:
Interest rates are still very low, and are expected to remain so for the foreseeable future, so there are fewer concerns on debt servicing than there were in the past.
There are reasons not to be too alarmed about it ticking up, but it is absolutely something we will watch carefully.
However, not everyone was so optimistic.
Head of Policy at StepChange Debt Charity, Peter Tutton, believes recent consumer behaviour mirrors that leading up to the 2008 financial crisis.
Levels of outstanding borrowing on credit cards, personal loans and other forms of consumer credit are approaching the 2008 peak, and the growth rate of net lending is at its highest since 2005. Alarm bells should be ringing. Previous experience shows how such increases in the levels of borrowing can leave households over-indebted and vulnerable to sudden changes in circumstances and drops in income that can pitch them into hardship.
Lenders, regulators and the Government need to ensure that the mistakes made in the lead-up to the financial crisis are not repeated and that there are better policies in place to protect those who fall into financial difficulty.
As they say, those who don’t remember the past are doomed to repeat it.
Should you reduce your debt?
If you are concerned about your level of debt, your starting point should always be to build a complete picture of your financial situation, including all loans, credit cards, etc. Make sure you record both the amount and the interest rate on each debt.
Next, carefully compare your monthly income and monthly expenditure to determine your disposable monthly income. This is the money you can pay towards creditors.
If you want to maximise payments towards your debts, reduce luxury expenditures like subscription TV packages, expensive mobile phone contracts and eating out.
In the event that you cannot pay off all your debts, prioritise the debt with the highest interest rate. Paying off those first and then moving onto debt with lower interest rates cuts the total you’ll end up paying.
Always ensure you are paying at least the contractual minimum on all debts. This ensures no missed creditors can take action against you.
Finally, if you are unable to steadily and significantly reduce your debts — for example, if you are only able to make minimum payments each month — then you should seek help and advice from a properly regulated expert.
At 180 Advisory Solutions, our knowledgeable advisers are waiting to help you clear your debt whilst living your life free from chasing creditors. Contact our team today for free initial advice.