'Debt is good' message may be luring young people to disaster
Banks are teaching teenagers to accept debt but not what to do when things get out of control, reports Neasa MacErlean
Saturday 12 June 2010
Brace yourself for a volatile financial future. If research due to be released on Monday by R3, the association of insolvency professionals, is correct then we could all be in for a white-knuckle ride as more people start to struggle with debt and go bankrupt. And those affected by this are not just the debtors, but the whole of society. Debt can travel through communities like a virus – hitting families who try to bail out their weaker members, destroying relationships, emptying the coffers of businesses affected by bad debts and even lowering the salaries that companies can afford to give their employees.
At first glance, R3's briefing paper, Barriers to Seeking Advice – pre-released exclusively to The Independent – may seem to tell us what many of us already know. It reveals "a clear generational split on attitudes to debt", with younger people far more likely not to open bills and to avoid contact with creditors.
R3's research is based on almost 2,000 people who have debt problems but who have not yet sought help with them. Over a third of 18- to 24-year-olds (36 per cent) and 29 per cent of 25- to 34-year-olds had not looked for help as they felt it was "easier not to think about it". But the figure was much lower for 35-to 44-year-olds (19 per cent) and lower still for older people.
While these results may not be surprising, the implications are still worrying. "It's inevitable that the young are more lax about debt," says Richard Murphy, director of Tax Research UK. "They have got to be to survive. Debt has been institutionalised for them. This is a deliberate ploy by the financial services industry in combination with Government. We should be very worried about it. The problem is not the young people but the capture of the whole idea that debt is good."
In spite of the worldwide financial crisis which was partly triggered by excessive debt, and the prospect of several years of austerity in order to pay down government borrowing, there are many signs that, on the whole, we are not going to change our ways. "I don't know how much we have learnt," says the insolvency practitioner Bev Budsworth, managing director of the Manchester-based company The Debt Advisor.
"Credit institutions are really keen to catch young people. Young people are really coerced into taking out store cards. And store cards are the tipping point for young people. They all have good intentions of clearing the balance but it is very easy to make just the minimum payments. Before you know it, you have accumulated £1,000 in debt," she says.
Going from this level of debt to something unmanageable can be worryingly easy. "It doesn't take much to knock people off course," says R3 president Steven Law, a partner at the Ipswich office of the accountancy firm Ensors. "Debt spirals out of control so quickly when people aren't making payments to cover the monthly interest."
The RSM Tenon Tracker of personal insolvency in England and Wales shows "the fastest-growing age groups being the over-65s and the under-25s", says RSM Tenon's head of bankruptcy, Mark Sands. Under-25s accounted for nearly 5 per cent of all personal insolvencies in the first three months of 2010. Nearly 2,000 people in this age group went in for bankruptcy or another official form of insolvency, up 27 per cent on the year before.
Since people tend to build up debts over a period of several years, these figures would suggest that many of those getting into trouble are as young as 17 or 18 years old. This could be because the cost of going to university can now mean accruing debts of more than £20,000 for people who do not have families to support them. But the role of the banks and other lenders is also raising questions.
For instance, the Government has promised "a new framework that promotes responsible and sustainable banking, where regulators have greater powers to curb unsustainable lending practices". If banks had not lent too freely, there would be no need for such an initiative. The figures from R3, however, suggest that around 2 million adults are in significant financial difficulty – and that would include 100,000 under-25s if the RSM statistics are representative.
A Citizens Advice caseworker, who prefers to remain anonymous, thinks that banks cultivate the young. "Faced with an old person in their forties or a young person in their late teens or early twenties, a bank will always go for the younger person. The bank will offer the younger person more in terms of an overdraft," he says. Young people are more attractive to lenders, he adds, as their longer life expectancy gives them more opportunity to build up debt and to earn. And if they really go off the rails early on, the parents can often be counted on to help pay back the debts.
Banks have also played a major role in something that should be extremely positive, the growth of personal finance education over the last decade. Barclays' Money Skills packages and NatWest's MoneySense for Schools will be well-known to many teenagers. NatWest is very proud of its scheme, saying, for instance: "If you think you might be running into financial difficulty, then MoneySense can help." Mr Murphy takes a different view. "They are teaching people to accept debt. What an absurd scenario that is."
The need for more money education is one of the main themes being promoted by R3. But money education has never been more widely available than in the last six years. In that same period, personal debt has risen nearly 50 per cent across the UK to a total of £1,460bn, according to charity Credit Action, which adds: "Individuals owe more than what the whole country produces in a year."
In the future, as a nation we will be dependent on generations of graduates who will start off their careers with a mountain of debt which, in many cases, will be far more than they earn in a year. We will have to hope that they do keep on paying their debts and do not get downhearted in large numbers.
Maggie Kirkpatrick of the Consumer Credit Counselling Service is not optimistic about the ability of this generation to pay back their debts. "Students leaving university now are finding it harder to get higher-paid employment," she says. She detects amongst them "sheer disappointment at not being able to achieve what they expected". And she hopes that they do not get so disillusioned that they just give up on the debt repayments, but she says: "That might be something that grows in future."
Indeed, young people do have an incentive that older people do not have to give up on repayments. "There is no fear of bankruptcy because they have nothing to lose," says Sands. Few own their own homes; their cars (if they have them) usually cost them very little; they are unlikely to lose their jobs as they are mainly trainees; and they can still work their way round the world if they want.
But if students do keep on course with repaying their debts, Murphy is concerned at the other sacrifices they have to make. "This debt restricts their freedom of choice. They may feel they have got to take the highest-paying jobs," he says.
By the end of June there will be more information available from R3 about the price to society of personal debt. Its geographical analysis of insolvency is expected to show a much higher incidence of bankruptcy in coastal areas than in inner cities. Insolvency appears more likely to happen in zones of low incomes and high unemployment; and, in turn, a higher insolvency rate will slow down the economic growth of an area.
Steven Law of R3 says: "When more people are not spending, it can hardly help a consumer-led recovery." In other words, our own prosperity is tied in with that of our neighbours. And if young people are likely to default on their debts more often in future, that is an issue that concerns us all.
'£20,000 of debt is like a big cloud over your head'
Music graduate Jane (not her real name) would like to do a masters degree. But she says: "It would be impossible." The reason that she cannot go back into study is that she is still carrying £20,000 of debt. Now 25, and working as a teacher of English as a foreign language, she is hoping to pay off her bank and student loans by the age of 30. "Having £20,000 of debt is like having a big cloud over your head."
At the end of each month the graduate usually has several days where she cannot afford to buy anything or go out. If she goes abroad she will earn more.
So Jane is hoping to land a job in Japan, where the salaries are relatively high. Once she clears the loans, she will be able to live her life more naturally and in tune with her true ambitions. "I don't think about the debts much," she says. "What I think about more are the opportunities I don't have. That gets me down." Among her friends at university, some were financially secure as they came from families which could give them some support. Some, such as Jane's, could not afford anything.
She does not agree with any suggestion that young people are particularly irresponsible in either running up debts or repaying them. She says: "If it is completely your responsibility and you see a quarter of your income eaten away each month then you can't be flippant about your debts."
10 tips for taking out a personal loan
Simon Read: Frozen in time - the expat British pensioners who deserve a better deal
Donald MacInnes: My wasted hours in the retail deserts of Dixons-Carphone
Pension firms must ask consumers more questions, says City Watchdog
Money Insider: Smart alternatives to the pensioner bond
- 1 The BBC has just done more to eradicate ‘terrorism’ than all our wars since 9/11
- 2 Dog thinks owner is drowning in lake, dives in and tries to pull him out
- 3 Thank heavens for Louise Mensch and her foul-mouthed tweets to world leaders
- 4 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 5 Phil Neville backtracks on Tomas Rosicky 'I'd smash him' comments from Match of the Day 2
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
Islamic history is full of free thinkers - but recent attempts to suppress critical thought are verging on the absurd
British grandmother Lindsay Sandiford faces execution by firing squad in Indonesia
iJobs Money & Business
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...
Day In a Page
Hibernate during winter and make your living during the summer at this busy guesthouse with panoramic sea views, in the village of Lynton
A four-bedroom penthouse next to the Tate with direct views of St Paul's from two floors of luxurious living space
A four-bedroom detached home surrounded by spacious gardens and woodland, close to New Pudsey
An 18th-century, three-bedroom home near Langstone Harbour built from ships beams with vaulted ceilings and wood burning stoves
A five-bedroom semi-detached home with a mix of period and modern features in a popular and convenient location
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village