Let’s cut back on credit so we can put money aside

Borrowing is ballooning.

In May, the Financial Times1 reported that “there is a large section of society drowning in personal debt, on credit cards, overdrafts, hire purchase and other high-cost credit.”

Last week, the Daily Mail warned that “Debt charities say swathes of the country are living on the never-never, where one false move could plunge them into ruin.”

Now these warnings are official. The Bank of England’s half yearly financial stability report has highlighted rapidly growing consumer borrowing via credit cards, personal loans and, notably, car finance.

Collectively known as consumer credit, these forms of borrowing have grown by more than 10% in the past year, far outstripping the growth of incomes.

The latest Scottish Friendly Disposable Income Index echoes the above, showing three quarters of British households are reliant on credit to make ends meet. Nearly one in five (17%) Brits who are credit dependent found themselves short of money on more than five occasions in the last 12 months and needed credit to support themselves until their next pay cheque.

The quarterly report has been compiled in conjunction with leading think tank, the Social Market Foundation and it shows that the median UK household has £1,067 left each month after paying for absolute essentials.

The majority of households are downbeat about their financial outlook, with nearly one in five (18%) saying they are currently better off than 12 months ago and 42% saying they have less cash now than a year ago.

The overall problem is that we are living in a world where wages, currently only going up by 1.7 per cent, are simply not keeping pace with inflation – now running at 2.9 per cent2.

But with a very competitive market for credit with many credit cards offering zero interest for limited periods, is it any wonder cash strapped families find the temptation to flex the plastic perhaps more often than they should?

When it comes to savings rates, however, banks are not so keen to be competitive. Only one out of ten easy access savings accounts pay interest rates of 1% or more according to Moneyfacts.

With poor savings rates and attractive credit terms, combined with the squeeze on wages, it’s easy to see why people are likely to run down their savings and turn to credit to make ends meet.

However the tide could turn. If interest rates rise and credit becomes more costly then there is a greater chance of borrowers defaulting on their payments. This is why the Bank of England has forced banks to find a further £11.4bn in the next 18 months to beef up their finances against the risk of bad loans.

Times are clearly tough but more has to be done to encourage people to reduce their debt, manage their spending and put money aside for their financial future.


1 Financial Times: Why is Consumer Debt Hitting the Headlines?, Friday 23 June 2017

2 Daily Mail, June 21, 2017. http://www.thisismoney.co.uk/money/guides/article-4623036/Middle-class-borrowers-sitting-198bn-debt-timebomb.html

The information provided in this article was accurate at the time of publishing and should be read in the context of the date it was published. Views in this article are those of the author alone and do not necessarily represent the view of Scottish Friendly. No advice has been provided by Scottish Friendly. If you are in any doubt as to whether a savings or investment plan is suitable for you, you should contact a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk. Advisers may charge for providing such advice and should confirm any cost beforehand.