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Is Family Debt Spiraling?

Published on:January 13, 2016Author:Andrew Steele

According to the latest family finance report by Aviva, family debt has increased by 42% in the last 6 months of 2015; the highest level seen for two and half years.

BBC News have asked Bev Budsworth MD of the Debt Advisor Ltd based in Old Trafford in Manchester to comment on these stats and Bev’s responses to the questions posed to her on BBC News live coverage on Wednesday 13 January 2016 are summarised below.

HOUSEHOLD DEBT STATS

On the Aviva debt stats Bev added, “An increase of 42% in 6 months is significant. According to the Money Charity, UK consumer debt has increased by similar sums in the past 2 years; £9BN per year an increase of around 5%.

However, if total debt is taken in account, the past year has seen an increase of £36BN bringing total UK debt to £1.47 Trillion, the highest ever.

The increases are causing concern, according to the Centre for Social Justice “CSJ” there are 8.8M people over indebted borrowing on credit cards, overdrafts and pay day loans. Research commissioned by the CSJ and undertaken by JP Morgan has found that over 15 million people are going into debt to pay their bills.  Many of these people are low income families who cannot access reasonable priced credit and have to therefore rely on expensive forms of credit or incur penalties when they end up with insufficient funds to meet their household expenses.

REASONS FOR INCREASES IN DEBT

Low Interest Rates

The low interest rate of .5 % which has now held for nearly 8 years and marks a most exceptional and unusual period for UK monetary policy – with the official Bank Rate now expected to be kept at its lowest level in recorded history for the best part of a decade. Low interest reinforces a “spend more, save less” mentality. It means our mortgage payments are at an all time low and we can borrow money more cheaply.

Low Inflation

Inflation has been dropping steadily since it peaked at 5.2 % in September 2010. January 2013 saw inflation dip below 2% and in August 2015 it hit zero.  This means we can shop more cheaply especially as supermarkets have to compete with discounters such as Aldi and Lidl and also contend with price wars at the pumps as petrol prices dipped below £1 per litre for the first time in 6 years. This is all good news for consumers who have seen prices decline, leaving more pounds in their bank accounts for spending.

Consumers Expectations are artfully managed

From the moment we open our eyes, our expectations are very deftly and artfully managed by businesses wanting us to spend our money.  As consumers have become more discerning about how they consume, businesses have become more artful with getting us to engage with texts, emails, social media, radio, TV programs promoting celebrity style lives. The feel good factor as a result of low interest rates, low inflation, etc has meant that we have been spending. Consumer spending hit an all time high in the 3rd quarter of 2015 at £278.2 BN. This is £10 BN higher pre-credit crunch – the last quarter of 2007.  A record low for consumer spending was £60.5 million in 4th quarter of 1956.

Easy Credit

Bev Budsworth MD of The Debt Advisor adds, “Yes I do think it is too easy when it comes to high interest credit cards and short term loans. High interest cards like Aqua and Vanquis extend credit to individuals who are on debt management plans and in IVA’s. A recent case referred to us was an individual with 14 creditors. Despite having adverse credit and a judgment, pay day lenders and finance companies lent him a further £10,000 when he clearly could not afford his existing debts.

If you Google “no credit check pay day loans” there is a plethora of companies offering no credit check loans. This is despite a Good Practice Charter that 90% of payday lenders are supposed to have signed up to which provides that they must carry out proper and appropriate affordability assessment and credit vetting to check that customers can afford the loan.

Should regulators do more to make sure market is more fair and balanced and consumers are better protected?

When the FCA took over responsibility for regulating the consumer credit market in April 2014, many of the new rules were based on existing standards apart from new rules for the high cost short term lending market and debt management sector.  These two sectors have seen the most change with many operators exiting the market.

The FCA is undertaking a detailed review of the rules in the Consumer Credit Handbook or CONC and a review is to be submitted to the Treasury in April 2019.  This includes rules on pre-contract information, terminations, early settlements, etc. The new rules and principles aim to ensure that consumers are treated fairly.

However, the FCA have a tough battle as they are responsible for taking over the regulation circa 50,000 businesses involved in offering some form of consumer credit in a market which is worth £200 billion. It will take time to ensure that the new regulation is fit for purpose and working.

The FCA is very concerned about the consumers who get themselves into debt difficulties and are undertaking research on the drivers that push people into untenable financial situations.

On 1 October 2015 the new Unfair Trading Regulations and Unfair terms in Consumer Contracts regulations came into effect. This replaces the Consumer Rights Act. The FCA have set up a consumer helpline to report scams. However, they do not investigate individual complaints and expect consumers to lodge complaints direct with the company in question and if your complaint is not dealt with adequately, then directing your complaint to the Financial Ombudsman.

Will interest rises see more people get into difficulty?

Research by The Building Society Association of people with a mortgage found over a quarter (27%) believed they would face financial difficulty when interest rates rise. The YouGov survey reveals that 39% say that they will have to cut spending on holidays and eating out to cope with rate rises, whilst a fifth say that they will be forced to cut back on essentials like clothing and food.

There are many including Joanna Elson of Money Advice Trust who believes that mortgage-payers are in for a big financial shock when interest rates begin to rise.  She has stated that for many, that shock will be too much to absorb – and there is a real risk that we will see a surge in unmanageable debt problems as a result.

Are we becoming a debt culture nation?

According to the Office for Budget Responsibility total UK debt will increase to £2.551 trillion by 2021. This suggests that average household debt will almost double from £53,918 at present to £94,481.

Debt has been around for centuries and at present consumer spending and the increases in debt are fuelling economic growth. However, this is at the expense of saving and with more people not saving and in fact pulling money out of pensions, this is giving rise to real concerns about lack of investment which is vital for sustainable growth in the economy.

Concerned about unmanageable debts?

The Debt Advisor has a handy budget calculator to enable you to see exactly where you spend your money each month.

If you are struggling with debt there are a range of debt solutions available for individuals struggling with debt and the right type of solution depends on your circumstances. If you are struggling, please do give our team a call on 0800 0851 825 or use our contact form. Our advisors can speak with you about all available debt solutions such as Debt ManagementIVAsBankruptcy and Debt Consolidation.

All debt solutions need to be carefully considered. IVA’s are formal solutions and failure to keep to the terms can result in your IVA failing and you could end up bankrupt.

There is also free debt help and advice available through a variety of debt charities. For more information, we recommend you visit www.moneyadviceservice.org.uk.

The Debt Advisor is authorised and regulated by The Financial Conduct Authority (reg no: 606669). We are also a member of the Debt Resolution Forum and we adhere to their codes and standards.