How are we really managing our debts?
Since mid-2008 'economic gloom' has become a stock phrase in personal finance writing and the standard explanation for almost any form of borrowing behaviour.
But the credit crunch didn't affect all sections of society equally and it certainly didn't change attitudes equally.
So who has been affected by a lack of credit (or an excess of it) and how?
Or, to put it another way: how are we really managing our debts?
What we want to know
This is a big subject but there are a few specific question that we're looking for answers to:
- Which groups have had less access to credit in the past few years?
- Why is borrowing still seen as desirable? Or, if it's not desirable, what evidence is there that consumers find it necessary?
- What can we make of claims that debt levels are decreasing?
- How many people are struggling with problem or unmanageable debt?
Few go by the old adage 'neither a borrower nor a lender be' any more.
According to statistics from Credit Action, the average household debt in the UK, excluding mortgage borrowing is approximately £7,984.
If you only count the households who have an unsecured loan, likely to be those borrowing the most, the average almost doubles to a £15,353 debt for every household.
What's more the days of British reticence over debt seem to be drawing to a close: one in three people questioned in a 2010 uSwitch survey said that there was no shame in being in debt.
However, it's easy to forget that these trends don't cut equally. The indicators are that younger people have found access to credit restricted while there is some evidence that older people's access has increased.
18 - 30
One of the groups worst affected by credit availability, for example, has been the young: no credit history and no chance of starting one without a credit history.
That could be one reason why the number of under-25s going to Citizens Advice with store and credit card debt problems fell 23% in the year to June 2011.
The number of complaints under 25s raised about unsecured personal loans also fell by 10%.
However, R3, the insolvency trade body, has another explanation. Their survey of 2,000 adults in debt found that 36% of the 18-24 age group had not contacted professionals for help.
Just 9% of 55-64 year olds gave the same response.
30% of the youngest group that didn't seek help 'don't know where to go' and 44% are put off because they believe that the advice will cost money.
This is a view also reflected in our information on dealing with debt.
30 - 50
According to new research released by Standard Life in 2011, monthly credit card costs increase by more than £100 as people enter middle age (34-44).
The researchers found that the same group has an average of 11 regular financial commitments and spends an average of £1,160 per month satisfying them all.
Over 50s are more likely than ever to be in debt.
In June of 2010 alone, GFK NOP report, retired people spent an average of £354 on their credit cards, a spending high which hasn't been seen since the height of the credit crunch in October 2008.
In 2011, 21% admitted they would have outstanding debt when they started receiving their pension, according to figures released by insurer Prudential.
Just over half (55%) of those who went into retirement owed money on credit cards and mortgages were the second most common form of pensioner debt, 52% will owe that way.
Just 19% will still owe on a personal loan and 14% think they will still need to pay off their overdraft when they've retired.
Prudential spokesman Vince Smith-Hughes said that the figures showed how the class of 2011, "a previously risk-averse generation of savers, took advantage of the consumer credit boom of the last decade."
Very low returns on savings can't be helping either.
A study by Aviva in 2010 showed that the elderly were more frequently dipping into their savings to cover unexpected expenses.
92% of those over 55s have had to deal with unprecedented costs over the last five years, the study found, and two thirds of the older age group said they feared the rising cost of living.
So why are we borrowing?
Debt as investment
The obvious answer is that debts can be an investment in the future - like taking out a mortgage or using a personal loan to put an extension on the house.
According to a January 2011 survey by Scottish Provident the average Briton wouldn't worry about their finances until they owed £15,837 in unsecured lending.
However, research suggests that the feeling that debt is an investment can be even more insidious than that.
For example, a June 2011 study of 3,079 students published in the Journal of Social Science Research found that their average credit card debt of £2,553 made the twenty-somethings feel 'empowered'.
"In spite of many cautionary signposts," the study said, "young people appear to be more likely to see debt as an investment rather than a burden as they begin their transition to adulthood."
Many of the American students said the debts gave them a feeling of control over their lives.
Are UK students labouring under the same misapprehension?
The study hasn't been replicated over here but a study published in the Journal of Consumer Marketing called, tellingly, "'I'll always be in debt': Irish and UK student behaviour in a credit led environment" had broadly similar findings.
The, admittedly small, study identified a proportion of students - largely 'Celtic tiger' Irish students - who, they said, "anticipated a future where debt would continue to play a central role."
However, both studies noted that the debt often turned quickly to regret.
The message of both seems to be that students are particularly vulnerable to spending first and thinking later - often much later, when they find themselves crying into the receiver at their telesales job.
Debt as therapy
Another theory frequently put forward is that consumers borrow as a kind of therapy: buying more than they really need to make themselves feel better rather than out of any real need.
Research published in May 2011 by the London Business School and Cornell University claimed to show that we're more likely to hit the plastic - to avoid the guilt associated with laying out loads of cash and spend more overall as a consequence - when we've been having a bad day.
Participants performed a fake computer test. Half were told they had passed and the other half that they had failed.
Later, those who had failed the test were far more likely to pay by credit card, the researchers said.
This study might explain why many have continued to borrow despite the poor economic outlook. We're far more complex than figures in some spreadsheet: perhaps we were spending because of the poor economic outlook.
Or, to put it another way: we tend to spend more on what we want, rather than what we need, and what we want is often based on how we feel.
'Just until payday' debts
In September 2010, a study by insolvency body R3 found that more than four in ten UK adults run out of wages before payday and, on average, have ten cash-free days to go before they're paid again.
Of the 42% that told R3 that they ran out of money before their next pay day, 11% said they did so on a regular basis while 31% said they only did so occasionally.
Borrowing on credit cards and overdrafts took the strain but, ironically, borrowing was itself a cause of struggle for a high proportion:
- 35%: said credit card payments contributed to them running out
- 20%: overspending on going out
- 15-17%: payments on bank loans, mortgages or home items
The same effect is driving the UK's payday loans market and is writ large every January after some employers pay their employees' December salaries early to make Christmas shopping easier.
According to the Post Office's Consumer Credit Report in 2010, for example, 43% of cardholders used their plastic to pay for groceries in January, a far higher proportion than in a normal month.
How often do we repay credit card debts?
Many studies on debt stretch credulity, when they seek to suggest that all ordinary purchases made on a credit card are always a sign of economic strain.
Whether that's true of everyday debt - that is, credit card use and debit card use with an overdraft - very much depends on how these products are used.
So how are they used?
UK Card Association statistics from September 2011 show that three in every five credit card users repay their balance in the full at the end of every month.
Of the 40% of credit card users that don't repay in full, there's no record of how many are otherwise avoiding paying interest with a promotional 0% purchase or 0% balance transfer offer (though we've had a go here).
However, the trade body did find that in 2010 62% of credit card users never paid interest on their purchases.
In 2003, just 54% could say the same.
On the other hand, according to research from Equifax, one in five of those carrying a credit card balance of between £1,000 and £5,000 don't expect to pay off their debt in under a year.
However, just 25% of credit cardholders fell into that debt level so that's only 5% of cardholders carrying debts overall.
Just because the majority pay off their balances in full, however, it doesn't make it less important that a small minority of credit card holders could be at real risk of falling into unmanageable debt.
17.1% of those surveyed by Equifax were carrying a balance of over £5,000 and around half of those were carrying over £10,000 in debt.
7% of respondents to the Post Office's credit conditions survey estimated that they'd take over three years to clear their entire debt, even taking into account ingenious repayment systems, that's far longer than even the market's longest 0% balance transfer deal.
We'll look at this minority again in the last section.
In the first quarter of 2011, the average amount of savings fell to £1684, £100 less than the previous quarter's average.
But the average debt, both on credit cards and unsecured loans, also fell to £2513, an 18-month low.
This pattern - falling savings, falling debts - is one we've seen throughout the credit crunch and indicates that repaying debts using savings is becoming increasingly popular.
Five million people in the UK have avoided credit card debt over the past two years by dipping into their savings, according to an ING Direct survey from January 2011.
The recession, high unemployment, rising VAT and inflation are just some of the factors which have significantly raised the average living cost in Britain.
And costs of the daily essentials are still rising: petrol prices are now within just a penny of reaching a record high, for example, according to the AA.
As ING Direct's senior economist James Knightly puts it, "The economic headwinds battering the household sector are not relenting. With food prices going up and utility bills set to increase sharply, household finances will remain strained."
In light of this, James also concluded that, "savings are likely to be run down further this year."
Finally, let's try and get some clarity on unmanageable and problem borrowing.
Lying about debts
8% of those in a relationship hide a credit card from their partner, according to research released by Moneysupermarket.
And, if we believe both this survey and one from Halifax a few years back, Brits seem to have become even more duplicitous about their credit cards over the past few years.
The 2009 study found that just 1% of credit card holders in relationships were keeping a secret card.
40% of secret credit cardholders in the Moneysupermarket survey said they were holding a covert card because their partner would be annoyed by the amount of money they spend. Perhaps most telling was the finding that 11% didn't want their partner to know that they had any type of credit card.
Still, 29% said that they had a secret credit card to make it easier to buy surprise gifts for loved ones, a finding the researchers clung on to for dear life.
Research from the Post Office in 2010 found that almost a third of people in debt hide the true extent of their debts from family members.
The truth about debts
As of June 2011, 3.2 million households in the UK were in financial difficulty, with some form of debt action being taken against them or with three months of outstanding monthly payments.
If that figure is accurate it's astonishing: about one in ten households.
2011 statistics on the Consumer Credit Counselling Service (CCCS) clients show, predictably, that it's the poorest who are most in debt, as a proportion of income.
On average clients owe:
- Benefits claimants: 124% of income
- Low-income families (under £13.5k): 120% of income
- Mid-income families (£25 - £50k): 95% of income
Financially vulnerable consumers
In addition, according to CCCS statistics from 2011, two million low-income earners, 1.1 million unemployed people and 600,000 lone parents, who are all likely to be on benefits, were also named 'financially vulnerable' by the charity.
A third of those earning between £13,500 and £25,000 have no money left to pay their unsecured debts and neither do 25% of the £25,000 - £50,000 bracket.
Half of those earning £13,500 or less have no money at the end of the month to pay off their unsecured debt.
This means that any change in living costs, such as a drop in income, will send these households into default.
Similarly, 6% of those questioned by housing charity Shelter in August 2010 admitted to using credit cards to make rent or mortgage payments in the last 12 months - which translates as over two million people on a national level.
This is compared to the 4% who answered 'yes' to the question in a similar survey conducted in November 2009.
CCCS chairman Lord Stevenson said that the figures showed that, "the pain is going to spread wider and affect many more people than many commentators have previously assumed.".