Runaway debt levels expose 14 million Brits to grave new financial risks

Excessive borrowing via credit cards, loans and overdrafts could make the last recession look like a walk in the park

Out of hand: consumer debt has almost reached pre-financial crisis levels, according to the Bank of England

Fears are growing over the speed at which UK consumers are gobbling up new credit, putting their whole households on the line in the process, as the nation approaches a level of debt similar to that experienced before the financial crisis.

Last week the Bank of England published figures showing consumer credit increased by £1.3bn in April 2016, up almost 10 per cent in 12 months. This is the second highest rate of increase since the height of the last economic boom in December 2005.

Despite tax changes for landlords and uncertainty over the UK’s future in Europe dampening mortgage lending in April to its weakest rate of growth since 2012, British consumers currently owe £1,475bn, including £64bn credit card debt and £118bn on other loans and overdrafts.

With around 2.5 million people relying on credit cards for day-to-day living and the Financial Conduct Authority warning that it will take millions of people a decade or more to pay off their bills, the figures have set alarm bells ringing among debt campaigners.

The UK’s leading debt charity StepChange this week warned that runaway borrowing could have severe consequences for many households in the event of an economic shock such as the one economists warn could be caused by a Brexit vote.

“These debt figures are going north really quite quickly and we are increasingly concerned that households will find it much harder to recover from the next economic shock,” said Peter Tutton, head of policy at StepChange.

“We are now getting close to the outstanding consumer credit levels of November 2008, and with their needles already in the red we see 14 million people struggling with unexpected income shocks and unplanned bills, half of whom are using credit to cover them,” he added.

The problem is, he said, that the last time borrowing was this high we weren’t trying to cope with income squeezes, hadn’t been faced with a long period of recession, and weren’t lulled by record low interest rates.

“The rates of credit growth are starting to get back to the bananas levels of the early 2000s,” Mr Tutton warned. “But this time it’s rising from a much higher starting point.

“And with the rise in zero-hours contracts, welfare reductions and self-employment, help for people when they do fall over isn’t as comprehensive this time around. There is just no slack anywhere in the economy.”

Meanwhile the return of questionable lending practices, including unsolicited credit limit increases, are fuelling the debt. A study last week suggested that banks increased credit limits for more than half of all credit card holders in 2015, without their request, which had pushed half of those into further debt.

Campaigners are calling on the Financial Conduct Authority to ban the practice, arguing that it fails to meet the criteria of responsible lending based on thorough affordability checks – increasing the vulnerability of those already struggling and dragging a new group of people into debt.

A five-step guide to dealing with debt:

1. Work out how much money you owe and which debts are the most urgent.

2. Decide how much, if anything, you have available to pay off your debts and deal with the most urgent first.

3. Look at your options for dealing with less urgent debts and work out how to pay them off.

4. Contact your creditors and make arrangements to pay back what you owe.

5. Work out your options if you don’t have enough money to pay off all your debts.

Charities including StepChange.org offer free impartial debt management advice and support including budgeting, writing repayment plans, negotiating with creditors, and guidance on bankruptcy and other options for those who can’t afford to pay off some or all their debts.

The Gov.UK debt page provides a basic rundown of options for those whose debt is unrecoverable.

Citizensadvice.org.uk provides a step-by-step guide to managing and reducing problem debt as well as a comprehensive list of sources for further help.

Self-employed workers in England and Wales can also seek help from Businessdebtline.org.