The Merkle

A Nation Living on Credit – Should We be Worried by Borrowing?

Never mind a nation of shopkeepers, as the old saying would have it, the British are now a nation of borrowers. The average household in the UK now has about $14,000 in debt – and that’s not even including the cost of their mortgage or student debt.

Bank of England data also shows that personal debt shot up 10.8 per cent in the year to November 30 last year.

Both figures are the highest they have been since the financial crash of 2008.

Once you factor in all debt, the average household owes almost$60,000 and the total owed on credit cards across the country is almost $70 billion – about $3,000 per household.

It’s clear, then, that owing money is commonplace. But, what should we make of it all? Is this a worrying sign of a financial crisis being stored up for the future or just a natural part of modern life?

Living within our means?

Debt is an issue that can morph into a serious problem if the borrower does not have the means to pay it back. In that respect, the question is less about the scale of the big numbers above and more about whether we can ever hope to pay them back.

Bank of England chief economist Andy Haldane, speaking to the BBC about rising borrowing, was not unduly worried by the growth in debt during 2016.

He said: “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.”

Yet The Telegraph recently published data that showed how much the rate of spending among UK households has stretched beyond the amount they actually bring in. Net borrowing – the amount of debt over and above earnings – was due to be $36 billion in 2016. That figure is predicted to grow to almost $55 billion in 2021. The post-financial crash period of 2009 to 2013 actually saw borrowing kept to a level below total earnings.

While Haldane might not to be too worried about the here and now, his boss, governor Mark Carney, has spoken out recently about the rapid rise in unsecured debt.

Household debt is high, although it’s not the highest in Europe. As a nation obsessed with comparing ourselves with others, it’s perhaps interesting to note that Sweden, Ireland, Norway, Cyprus, Netherlands and Denmark all experience higher levels of personal debt. The Danes’ debt stands at 265% of income, about double that of the UK.

Life on the edge

The worry is what will happen if things take a turn for the worse. Borrowing is currently cheap – with interest rates meaning that personal loans carry much less interest than they once did. If that picture worsens – and inflation is expected in 2017 – people who are currently managing their debt might struggle.

Yet, even with low interest rates, the rate of borrowing is pushing people to their limits.

An article in the Guardian stated that there are 8.2 million families, or 16.1 per cent of the country, who are saddled with ‘problem debt’. Recent figures also showed that more than 90,000 people became ‘insolvent’ in some form during 2016.

Even in a period of low-cost money, the price is too high for some. Perhaps that’s no surprise given that wages have fallen in real terms by about 10 per cent since 2008. Borrowing, at least in part, is filling the gap that has arisen between pay packets and the cost of living.

That’s even more marked when you consider that low interest rates (and a lack of disposable income) has also seen savings drop.

Statistics show that we are saving just 4.4 per cent of our disposable income, which is half as much as in 2012 and the lowest rate since 1963, when records began. With that in mind, people have little by the way of a rainy day fund to either dip into in the first place or to bail them out should their borrowing become a burden.

Happy birthday to the credit card

The UK’s borrowing addiction is often seen as a generational change. It’s certainly the case that many people born in the first half of the 20th century were wary about buying something ‘on the never-never’. Not only that, but credit was not available to this generation.

Last year marked 50 years since the credit card first came to these shores. Back in 1966, only Barclaycard offered this service and it was viewed with skepticism – an American import that was alien to a culture forged in the austerity of the post-war years.

It took a while to catch on and, indeed, Barclaycard itself now admits that a campaign based on using scantily clad ladies to encourage people to sign up for credit cards would be ‘absolutely unthinkable’ today. Yet, over time, increased numbers of providers and an expansion in the number of places that credit cards could be used helped to take them mainstream. By 1999, half of UK adults had one.

Yet we’re now approaching an age in which the ‘baby boomer’ generation, which had access to credit and a more relaxed attitude to borrowing, is coming to retirement.

Joint research by Age UK and the International Longevity Centre (ILC) has found that debt is a rising issue among older people – leading to the associated issues of family breakdown and depression.

It found that the equivalent of 400,000 older people in the UK are paying more than £85 a week just to service unsecured debt while some have debts from unsecured lending of as much £15,000. That trend is only likely to continue as a nation of borrowers grows older.

For millennials, a secure financial future rests on a one-off event such as getting a promotion, gift or inheritance and that might well mean taking on more than they can chew in a debt sense – or certainly more than they can pay off in their working lives.

Managing money

However, it’s perhaps easy to overstate the doom and gloom surrounding personal debt. Debt can be an issue, but only when control is lost. That same could be said for driving, drinking and gambling.

We shouldn’t lose sight of the fact that managing your money effectively in this day and age often involves careful borrowing through loans, credit cards and other such methods.

Those who know what they are doing with credit cards can save themselves plenty of money. It can be cheaper to buy a car, home improvement or holiday ‘on the plastic’ than taking out another financial product, for example.

Laura Whitcombe recently wrote about her quest to swap her debit card for a credit card in 2017 in order to help make her money go further.

Writing for the Spectator, she explained: “I’ve taken inspiration from friends and family who’ve long been rewarded for paying for virtually everything other than their mortgage and bills on credit. I’ve watched as their spending has earned them perks including concert tickets, meals out, hotel stays and even free flights. So my plan is to do what they do – pay for everything that doesn’t incur an additional charge with my credit card and clear the balance in full every month.

“If my expected spending pattern is correct, not only will my current account be healthier because more of my earnings will stay in it longer each month but I could also fly business class for the first time without paying for the privilege.”

Financial literacy

Careful credit card spending can bring benefits, therefore, but in order to be ‘careful’ you need to be armed with the right amount of knowledge.

That’s why ‘financial literacy’ might be an issue. According to PWC, only about a quarter of millennials surveyed were able to demonstrate basic financial knowledge.

While loans and credit cards can be deployed in a smart way, it does mean understanding how they work and not tripping up over any of the potential pitfalls.

Take balance transfers, for example. The Government’s Money Advice Service notes how someone with a £1,000 credit card balance can save up to $300 just by transferring her balance. Knowing how this works is an important part of managing debt.

A generation of borrowers is a different proposition to a generation of financially savvy borrowers.

As a nation living on credit, the issues raised here should not be ignored. We need to be mindful of the total debt that is being carried, the likelihood of changes to the economy which might impact on the ability for them to be paid back and the fact that too few people understand how to properly manage their financial affairs so that they can carefully and astutely use borrowing to their favor.

On its own, personal borrowing might not cause a crisis but if one were to occur the current levels might leave an awful lot of people at risk of serious problems. The warning signs are there, the hard part is deciding what, if anything, can be done to ease the situation.