Debt: how to get out and stay out of it
The latest borrowing figures are scary for us as a society but arguably more so for individuals owing huge amounts of cash – but it can be beaten
Another week, another stark warning about our borrowing habits. But the latest numbers suggest things are far worse than we thought. PwC reckons our unsecured debt – on credit cards, loans and overdrafts – is growing at a rate of £80m a day. That’s £55,000 a minute, every minute.
Coming in at a total of £300bn, those figures don’t even include our most significant debts – mortgages. (Well, for those of us who have one.)
“The rapid increase in unsecured borrowing in recent years reflects a change of attitude on the part of households across the UK,” says Simon Westcott, consumer credit leader at PwC.
“The true scale of the issue has now been put into sharp relief – but there is still more to come. We project that growth in unsecured borrowing across the UK will continue over the next three years, albeit at a slower rate.
“Our projections show we are heading for an unsecured debt pile of more than £340bn, or around £12,500 per household before we reach 2020.”
But dig a little deeper and the figures vary dramatically between demographics, and not always in the ways we expect.
So if you’re in debt – and most of us are – what can you realistically do about it?
People in their teens
Our relationship with debt starts early these days. A third of 15- to 17-year-olds plan to borrow an average of £1,891 within a month of their 18th birthday, yet a quarter admit they have given no thought as to how they will pay it back.
Seven in 10 expect to spend money on credit or take out a loan before they turn 19, according to research by ClearScore. And a massive 94 per cent of this age group plan to use credit to fund major purchases before they hit 20, including cars and TVs.
Most young adults about to get access to the world of credit don’t worry about going into debt, and despite a recent push to include financial education in the school curriculum, they’re doing it without much knowledge.
Only 8 per cent of 15- 17-year-olds know what an APR is, for example, and only 13 per cent are familiar with the idea of a credit score.
Study after study shows that financial education can significantly improve people’s circumstances, including one from Cambridge University and the Money Advice Service back in 2013, which found that adult money attitudes are formed, like so many other things, by the age of seven.
“In today’s world there are many pressures on young children and their families which make financial education increasingly important,” Dr David Whitebread, of Cambridge University said.
“The ‘habits of mind’ which influence the ways children approach complex problems and decisions, including financial ones, are largely determined in the first few years of life. Simply imparting information is now recognised as being ineffective in this area.
“By contrast, early experiences provided by parents, caregivers and teachers which support children in learning how to plan ahead, in being reflective in their thinking and in being able to regulate their emotions can make a huge difference in promoting beneficial financial behaviour.”
Young Enterprise, formerly the Personal Finance Education Group, provides free materials, strategies and information for teachers, parents and carers.
If there’s one phrase that strikes the fear of debt into the heart it’s “student debt”. It’s no surprise that PwC’s research this week found that younger adults have more than five times as much debt as older borrowers – and are three times as worried about how they are going to repay it.
In fact, with student debt alone expected to grow to £160bn within six years, this week the Treasury Committee launched an investigation into student finance to work out whether the current system is fit for purpose.
“It’s undeniable that astronomical student loans have normalised debt for millennials,” says Rajiv Nathwani, director at Quivira Capital.
“However, provided students understand that this loan, unlike others, is a good form of debt, as it will open the door to greater financial gains through paying for further training, it needn’t encourage a debt cycle.
In fact, borrowing to fund education is only part of the problem with rent alone now accounting for around 60% of the 20 something’s income, renters are also twice as likely to have needed to use credit to pay for essential items compared with mortgage payers.
“Many of those who get into bad debt treat it like a yo-yo diet; they lose the weight or pay off the loan, and then go back to their normal consumption routine and the cycle repeats,” suggests Nathwani. “If you want to break the cycle, rid yourself off any temptation – by cutting up your cards, for example.
“And if you’re in a dangerous financial position, prioritise your debt. People typically opt for the tick list approach; paying off a debt they can afford without taking interest rates into account. If you have a £500 debt that you could pay off, but a £5,000 debt with a higher interest rate, focus your efforts on the latter.”
The Money Charity offers advice and assistance for students struggling with their loans here.
In many ways, this is the age when killer debt could hit hardest. Spending rises with family – a child can now cost more than £187,000 to raise to 18 – but inflation, creeping mortgage costs and flatlining income make this generation one of the hardest squeezed.
“What’s really striking is just how critical it is that people aged between 35 and 44 are taking a hands-on approach to managing their mortgage,” says Ishaan Malhi, chief executive of online mortgage broker Trussle. “As the group most likely to be saddled with mortgage debt, they’re also the most sensitive to any increases in mortgage payments.
“The Bank of England is widely expected to raise interest rates for the first time in almost a decade next month, so it’s troubling to learn that one in eight borrowers aged between 35 and 45 would struggle to cope if their mortgage payments rose by more than £100.
“A 0.25 per cent rate rise won’t stretch most borrowers to this limit, but potentially being the first of many small rises, anyone nearing the end of their initial term should be jumping on the first possible opportunity to lock in a fixed-rate mortgage deal, before the whole market reacts to a base-rate rise.”
“Create a budget which covers all your weekly spends and expenses, including the amount you want to put aside for a ‘rainy day’ and savings,” says Jamie Smith-Thompson, managing director at pension advice specialist, Portafina.
“Budgeting for times when money is tight will mean you are less likely to fall into the debt trap in the future. Get into the habit of asking yourself “Do I need this?” If the answer is yes then the question has to be “Where can I get this cheaper?” Shopping around, especially online, can keep debt at bay in the long-term. Comparison sites, discount vouchers, and cashback offers are just some of the ways to save cash.”
Citizens Advice provides help for those struggling to meet mortgage costs here.
People in their forties
By their late 30s and early-to-mid 40s, a staggering 60 per cent of adults are worried about money, according to insolvency trade body R3.
“Although this is a time when careers can really take off, there are major monthly outgoings which can take their toll financially,” says Tashema Jackson, Money specialist at uSwitch.com.
“Almost half [44 per cent] of second-time buyers have no plans to save for a deposit to buy their next home, believing the equity in their current property will pay for their deposit. However, with house prices outpacing the growth in the price of flats since 2006, second steppers can unexpectedly be left short when they look to take this step.
“With so many competing financial commitments and with the cost of living rising at a time when wages are stagnating, consumers in their forties should take matters into their own hands and make sure that they are on the best deal for their circumstances, to help their household income go that little bit further.”
But there’s another financial circumstance that hits the fortysomething particularly hard – the effect of divorce. The average age for Britons to split is 46 for men and 43 for women. And while the immediate concerns include finding new homes and coping with single incomes, experts warn that divorcees risk a future of debt if they don’t discuss their biggest joint asset – their pensions.
The UK holds a massive £11 trillion pounds in household wealth and private pensions represent 40 per cent of this total, says Aviva. So agreeing a fair separation of this pension wealth at a time of divorce is critical for the future financial wellbeing for both parties.
The Money Advice Service offers help for separating couples here.
Those in their fifties
Debt in older age is perhaps the quietest of the UK’s debt stories. But as we recently reported, it shows signs of getting out of control, especially as working lives come to an end.
For this age group more than any other, decisions made in this decade will not only directly dictate their debt future but will also be uniquely irreversible ones.
According to Saga, one in eight of over-fifties still owe money on their mortgage – up to £80,000, if for example, they are one of the million people who have a second family later in life.
And with recent changes to the ways we can access our biggest pot of available cash – our pension – the implications of a short-term approach to borrowing can last a lifetime.
With some people able to get hold of their retirement savings at age 55, one of top reasons for cashing in their plans has been to pay off debt – particularly mortgages. But with the over-fifties also exposed to around £4,600 in typical unsecured debt according to Nationwide, a growing number are depleting money designed to support them later in order to fund short-term repayment needs.
The Government’s Pension Wise service offers free advice on pension management and how taking money out will affect future income.
“As you approach retirement you will be aware that your income is likely to reduce – so now is the time to pay off debts where you can and refrain from taking out heavy loans which will be hard to pay back. If you have to borrow, look at borrowing cheaper,” says Protafina’s Smith-Thompson.
“Your aim has to be getting rid of using credit cards altogether but first of all, check out whether there are other credit companies with cheaper interest rates – there will be plenty of 0 per cent offers. You can also help to break down immediate interest by taking advantage of credit company transfer offers where you are allowed set interest free periods on your loan – and there is no limit to how many times you can swap. But never borrow to get out of a debt.”
For this age group, with fewer opportunities to earn, living within their means is vital. And it’s likely to become ever more so.
The state pension will increase this year by 3 per cent thanks to latest inflation figures and the guarantee of the triple-lock. This dictates the old-age benefit must increase by either the rate of inflation, average earnings or an arbitrary 2.5 a year means pensioners are more likely to get an income boost than younger workers. The deal’s basic premise is that it ensures pensioners are able to buy the same basket of goods they could last year.
But the promise is understandably under threat, having proved an eyewateringly expensive policy to keep to and one which benefits a section of society that many argue is already reaping the rewards of historically generous pensions plans, including defined benefit (DB) policies.
Maximising all possible sources of income, as state pension increases are likely to be curbed, is now vital, including ensuring you’re receiving all the benefits you should be. Age UK suggests that older people are failing to claim £3.5bn in low income benefits, for example.
Where to get help
If you’re struggling with problem debt, you always have options and there are organisations designed to help – for free – including the Money Advice Service, which provides this guide to debt and how to manage it.