At some point in the last ten years, since the financial crisis (for that life-changing decade is an anniversary we are approaching), a change in perspective occurred: we went from seeing unsecured debt as something that is undesirable but occasionally necessary to something that is both unavoidable and normal.
Credit cards and loans, once something for emergencies, are now a vital way to get through the month until payday for millions of people. Research from GoCompare found that 22 per cent of the British public relies on credit cards to live.
The average consumer credit debt was £7,349 in April this year – £543.70 extra per household on a year before, according to the Money Charity. That’s a steep rise of almost ten per cent in 12 months – during a period that coincides with rising, Brexit-induced inflation.
Who are these people, dependent on handouts from credit card and loan companies to get by? It might surprise you.
According to GoCompare, the people so in the red that they have to take out more credit to avoid problems are people who you think really shouldn’t need it: it found that 30 per cent of people using cards to survive earn between £50,000 and £70,000, compared with 25 per cent of people who earn £15,000 (you may question the use of the word ‘survive’ – I think it means ‘to pay the bills’ rather than actually stay alive). The website found that the higher income bracket made up the biggest proportion of desperate borrowers and speculated that debt could now be a ‘keeping up with the Joneses’-led phenomenon.
It might not be just down to the simple urge to compete with one’s neighbour for material possessions. People who earn more are better credit bets, in the eyes of the providers, who want some certainty that their customers will be able to meet repayments. Higher income earners, with the wiggle room of a few extra hundred a month, are more able to do this. So they are more likely to be targeted with credit offers from the providers and be given higher maximum limits. Higher earners also have greater confidence to take on more debt. They can do the maths – they know they can meet repayments as long as they are earning.
People on lower incomes do not have the luxury of such certainty. For them, credit cards and loans are a bind they’d rather escape from, not a way to manage your finances. This is borne out by the research on how different income brackets choose to make repayments – the £70,000-plus brigade tend to pay just the minimum each month, whereas those lower down the income ladder try to pay off more than the minimum each month. They don’t want to be in that position. Higher earners seem quite happy to juggle credit repayments alongside ISA deposits.
But debt spirals can start at any level – the tipping point is the proportion of income being used up by monthly debt repayments on all types of borrowing including mortgages – if it rises above 50 per cent of gross income, so the experts say, you may be in trouble. With inflation rising so quickly, borrowers – even the high rollers – are in danger of reaching this point quicker than they might have anticipated. Separate research published last week showed that one in six UK adults is at risk of crisis debt, but less than one in five ask for help. This research didn’t show an income bracket breakdown of ‘likeliness of asking for help’, but you can bet that higher income earners are reluctant, when faced with higher debts than they can manage, to head down to their local Citizens Advice.
This is because despite the normality of credit, we still attach shame to its use. Sage messages of the wartime generation: ‘don’t spend what you don’t have’ etc, ring louder the more they are ignored. And so when debt does become unmanageable, especially for the higher earners with face to save, they don’t talk; they don’t ask.
The Money Advice Service thinks 10 per cent of the population could be quietly dealing with serious money problems. It suggested that young adults, renters, large families and single parents are at higher risk. It also suggested friends and family look out for signs. These include problem debt in the past, a recent life event such as having a baby, redundancy or divorce, having ‘must have’ items despite not having the income to cover them, seeming anxious, withdrawn or depressed, seeming secretive, a change of spending patterns, seeming tired or a sudden weight change.
If you are worried about someone you know, it recommends starting a conversation using your own personal experiences of money worries, mentioning free debt advice, offering to go with them to appointments and using the Money Advice Service.
Debt advice can have a ‘massive impact’ on people’s lives. The Advice Service says that within three months of receiving advice, 65 per cent of people are either repaying their debts or have repaid them in full, 73 per cent feel less stressed, two thirds are sleeping better, more than half reported better physical health and 69 per cent said their relationships improved.
Debt may be hidden, but it affects everything. That is no less true for higher earners who have found themselves in too deep than anyone else.
Rebecca O’Connor is the founder of Good With Money and a former financial writer at The Times