Recent warnings from the world of finance say the economy is in the ‘danger zone’, meaning there are concerns that the global financial system now has more risk than at the time of the financial crisis.
And now, it has been reported that family debt is close to pre-financial crisis levels.
The Office for Budget Responsibility issued projections for the economy and levels of household debt at the beginning of 2017.
They said this is set to rise from £13,900 at the end of the year and reach £15,000 before the end of the next Parliament.
However, that figure is inflated by the inclusion of student loans, points out Brian Milligan for the BBC. That area of debt has “increased rapidly over the last couple of years,” skewing the debt figures.
Taking out student loans doesn’t make for a much prettier picture, though. Household debt figures from the Bank of England, which doesn’t include student debt, put the nation’s total debt at £192bn at the end of November 2016. And it has risen more since then. That’s not a record, but is the highest the figure has been since the midst of the financial crisis in December 2008.
Unsecured debt, which includes credit cards, some loans and car financing, but not mortgages or loans secured against assets rose by £1.6billion in March 2017 alone. The fears are that if consumers default on their payments, in other words, the default level rises, it could push the economy towards a fresh financial downturn.
Some workers groups have said that the level of debt indicates underlying issues, such as workers having to use credit cards and payday loans to supplement their incomes, which they say, remain below pre-crisis levels in real terms. They have called on the government to lift public sector pay freezes and increase the minimum wage.
Earnings are, in cash terms, above the pre-crisis level but once inflation is taken into account it shows they are not fully recovered. In 2015 income was rising as inflation was at close to zero but with recent price rises causing inflation to rise, wages are not keeping pace.
The increase in household debt is a concern. As long as interest rates remain low, some economists believe it is affordable. But it is something that will need to be watched carefully. The recent rise in interest rates was relatively small but many believe more rises are inevitable. For those households already struggling to pay mortgages and rents and just keep their heads above water there is often no option but to use credit cards and often very high interest rate loans for bills and emergencies. Another interest rate rise could just be ‘the straw that breaks the camel’s back.’ pushing more households into debt.
The Financial Conduct Authority (FCA) recently reported it was looking into car financing companies. Car financing is now one of the biggest concerns as more companies are lending to those who are at high risk to default, such as low income, poor credit history individuals and even students. There are indications, however, that lenders are tightening up their lending criteria suggesting that getting a loan will become harder for many.
If you have built up some debt there are simple steps you can take to bring it under control. Firstly, minimise the interest you are paying on your debt. If it is on a credit card move it onto a 0% balance transfer card, if it is a personal loan see if you can switch it to a cheaper loan or move it onto a 0% money transfer credit card. Once you’ve reduced your interest rate as much as possible set up a direct debit to pay off as much as you can afford each month.
Don’t fall into the trap of saving at the same time as you are paying interest on debts. In the current interest rate climate, it is almost impossible to earn more interest on your savings than you are paying on your debt so focus on clearing what you owe first.
Finally, Take advice, there are lots of experienced debt advisors who offer free advice, including the Citizens Advice Bureau and debt charities.