In our latest Debt Tamers blog, we look at the ticking time-bomb of household debt, following worrying new stats and a warning from Nationwide. Here is how vulnerable young people can take cover
I saw a brilliant description of what the frenetic online world does to our frazzled little brains this week. A new book called “Irresistible”, by marketing professor Adam Alter, points out that a vast, multi-billion pound industry is trying to “break down our self regulation” EVERY TIME we log onto one of our devices. No wonder so many of us feel worn down by the constant inducements to buy this, buy that and buy the other.
And underpinning this pyramid of temptation is our personal debt industry. Offering us money, albeit at a cost, it promises to open up this whole new, endless world of consuming and satisfying false needs. If shopping is our addiction, personal debt is surely our primary enabler.
Of course, it is easier (if not easy) to absent yourself from this toxic relationship when debt is expensive. The problem is when banks and building societies throw cheap loans and credit cards at us – it is almost as if it would be foolish not to accept this money while it’s going cheap, right?
Hardly a week goes by when I don’t get an invitation in the post to take out a card with one particular firm that managed to get its grubby hands on my data. I don’t want it, don’t need it and haven’t taken it. But I wonder how many young people would shun the offer?
Also, think about it; we have a budget deficit in this country of £19.1 billion. While the arguments for and against deficits are complex and numerous, it’s fair to say that a government which has seemingly given up on meaningfully reducing the deficit this side of Brexit can hardly preach to households about the need to live within their means.
So all things considered, a rising tide of household debt in this country is not surprising. But that doesn’t make it any less frightening. Having dipped in 2014, household debt – excluding mortgages and student debt – has steadily been growing as low interest rates give families greater access to low-cost credit. Average debt, tracked by Aviva since 2011, has now surpassed its previous record of £14,950 (last seen in summer 2013) to reach £17,630 this winter – an increase of 18%.
Personal loans are now the single biggest contributor to household debt, followed closely by credit cards, and families are spending £216 a month on debt repayments, the equivalent of almost a tenth (9%) of their monthly outgoings. Astonishingly, even before interest is taken into account, the average family would now need almost seven years (82 months) to pay off their current debt by making the average monthly repayment, up from just over five years (61 months) last winter.
Furthermore, Nationwide Building Society issued an ominous warning earlier this month, saying that it would be making greater provisions for “bad” debt (i.e. people defaulting on loans) in the possible, or even likely event, that interest rates will rise sooner rather than later, making monthly repayments far more difficult for the Just About Managing among us.
J. Paul Getty once said: “If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.” So if we do start to see more and more people flunking out on their loans, it isn’t just the banks’ balance sheets that will suffer (if they aren’t sufficiently prepared). Greater provisions for bad debts are a classic symptom of a whole economy heading due south.
But muddying the waters further is the almost inevitable requirement for us all to take on debt at some stage. Want to own a house? A perfectly reasonable and sensible aspiration seems much less so when it is predicated on a huge loan that you may well be paying off for decades, thanks to comical house prices, stuttering wages and a culture in which paying off a mortgage early is a freakish anomaly.
Even those who can manage a mortgage well will require a history of borrowing to prove that, meaning they’ll have to sidle up to lenders earlier than they would like and take out products like credit cards and personal loans. And of course, there are still many borrowers who aren’t taking out debt for any particular reason (like improving their credit score or paying down a necessary large expense) except to maintain a particular lifestyle that they haven’t really thought through.
This blog takes the attitude that (some) forms of debt are a necessary evil. In an ideal world, we would all be living within our means, but the way our consumer economy works does not make that a realistic ambition. There are some crucial pillars to being smart with debt, which we have mentioned before but nonetheless bear repeating;
a) having debt for a specific reason, such as paying off a genuinely justifiable expense like a car or home
b) paying off as much, if not all your outstanding balance as quickly as possible, not allowing your debts to linger for any longer than they need to
c) using nifty hacks like earning cashback on credit cards (if you aren’t already earning in-credit on your current account, which may be just as or more competitive)
d) being incredibly on your rights when it comes to maintaining a good credit score, given the worrying incidence of mistakes that can occur without you knowing.
As part of our ongoing Debt Tamers series, we’ve been running through the ways in which you can ensure that your credit score is totally up to scratch, but note; this is not so you can take out debt willy-nilly but that you can rely on a good score when you really need it. So if a lender turns you down, you should ask them why. Lenders are required to provide you with an explanation, but if it isn’t in the rejection letter, you can ask for it. Then you can take action. It might be because you are not on the electoral roll, so that should be easy to fix. You may simply not be the sort of customer this lender wants – you earn too little or too much for their ideal profile. Better to check this beforehand on their website.
However, there might be other reasons that are outside your control (for now). The worse thing you can do is embark on a frenzy of new applications – you’ll just batter your credit score even more through the very act of multiple applications in a short space of time. So chill out and leave it for now (if you can) – postpone that holiday, tweak your budget and maybe take it as a sign that it wasn’t meant to be. If you have been knocked back because your credit report has alarmed the lender, start taking action. You can request to see your report free at CallCredit. Make sure your deets are complete, up-to-date and accurate. You can ask for incorrect information to be changed or removed and add a notice to explain any special circumstances.
If you do have to go through with a loan application, don’t guestimate any info. Fill out your form carefully. Guessing at things like how long you have lived at your current address won’t do. Providing wrong information will, at best, hold up your case and at worst be viewed as fraud. If a mistake is the reason, ask the lender if you can correct and try again.
If there’s anything that’s going to keep you awake at night, it’s having a mass of credit cards and loans, and even if you have lots of headroom up to your credit limit, this is an unnecessary temptation and won’t be viewed favourably when you come to get new credit. Are you being unrealistic in how much you want relative to your income? Are you using new credit cards and loans to pay off your old ones?
Stop. Think. Get a grip on the ol’ spending and ask your current lenders to bring down your credit limit, and start paying back the most expensive products. One by one. You can use a 0 per cent balance transfer card to service the cards charging the highest interest, so for goodness sake, take advantage and use it to free yourself from debt (if only for the time being…)
So long as you’re a canny borrower, stay within your agreed limits and meet your payments deadline every month, you shouldn’t fall foul of the re-emerging debt bonanza. But ultimately, the only real tonic for all that ails you (at least financially) is that magical thing called budgeting, where you review where the money actually goes, write it all down, and set limits for each area.
Last but not least, there are times when you need to get help. If you had an ongoing health problem that was causing you worry, you’d go to the doctor. So if you have chronic issues with debt and it’s starting to affect your peace of mind, don’t suffer in silence. There are a number of totally free services that you can use to help you get back on top, such as StepChange and the Debt Advice Foundation.