E: Household debt is creeping up in a time of financial uncertainty, according to the Bank of England.
Reliance on credit cards is rising in the UK in an unsteady financial climate, according to the Bank of England (BoE).
The organisation has predicted that the economy will slide downhill next year, on the back of the Brexit referendum result, meaning that many families who rely on credit to get them through the month will be hit hard.
Figures from the BoE reveal that in October this year, credit card debt soared to an all-time high of £66.2 billion. Unsecured lending swelled by 10.5 per cent in the last 12 months, hitting levels not seen since 2005.
Back in 2008, when the world was trying to deal with the global financial crash, households tightened their belts dramatically in a bid to reduce their debt – taking income ratios from 160 per cent to 140 per cent. However, new figures from the Office for Budget Responsibility reveal that debt is on the rise again.
The BoE is concerned that households may be unable to repay debts if unemployment rates increased or incomes dropped. For example, if unemployment was to hit 8 per cent then debt-serving ratios could jump to a level not seen since 2007.
A report from the central bank’s financial policy committee notes: “Highly indebted households could cut back sharply on their expenditure in order to service their debts, thereby amplifying the effect of shocks on economic activity.”
While large debts can seem like an insurmountable problem, there are ways in which people can free themselves from these financial shackles. In most of the UK – except Scotland – people can apply for a debt relief order (DRO), which sees large proportions of the debt written off, making repayments more affordable.
There are also other options, such as an individual voluntary arrangement (IVA) or bankruptcy, if a DRO is not suitable. If you live in Scotland, you can set up a debt arrangement scheme (DAS), which allows you to repay over time at a rate that is affordable. During this period, you will be protected from any creditors that are trying to recover any money owed.
In addition, people in Scotland can also use a protected trust deed to help them pay off their debts. This is a legally binding arrangement between an individual and their creditors that lasts typically for four years. After this time, any money still owed is written off – subject to some exceptions. Sequestration – which sees a person’s assets transferred into the control of trustee to satisfy creditors – is also an option, but is usually seen a last resort.
It’s not all bad news though, as a report from the British Bankers’ Association reveals that the price war on the high street is keeping costs down for consumers who are using credit cards, while many banks are still offering zero interest on balances for up to three years.
According to the organisation, a year ago 57.7 per cent of people were paying interest on their credit cards compared to 75 per cent a decade ago. To avoid racking up interest and charges, people need to shop around for the best deal and make sure they pay off what they owe quickly.