A stark warning about levels of personal debt and rising interest rates

Last month the Office for National Statistics released data showing that UK household expenditure exceeded income for the first time in nearly 30 years, with each household spending (or investing) around £900 more than they received in income during 2017. 

A stark warning about levels of personal debt and rising interest rates

Personal debt

Worryingly, the data also shows that rather than dipping into savings, the majority of people are borrowing more to fund this shortfall. Reflecting this, the amount of money borrowed by households last year was the highest in a decade, while the amount deposited was the least since 2011. 

This is unsurprising, with numerous surveys demonstrating a significant proportion of people lacking accessible savings to meet unexpected bill repayments. Our own, soon to be released Wellness Research Report shows that nearly 50 per cent of 25–34 year olds are unable to pay an unexpected bill of £500. Many are simply borrowing to make ends meet.

Rising interest rates

With the Bank of England raising interest rates to 0.75 per cent (only the second interest rate rise in a decade) and the prospect of further, ‘gradual’ interest rate rises on the horizon, debt will become more expensive to repay. And many are in for a rude awakening after a decade of low interest rates that had kept the cost of borrowing (whether credit cards, loans or mortgages) small.

I personally got to experience the effects of this as my own credit card provider added another two per cent to its APR this week, which has kicked me into action to shop around for a better deal. However many borrowers will either be unaware they can do this or unwilling to do so or simply won’t know or understand how they can do this.

A lack of financial confidence

The Financial Conduct Authority’s (FCA) credit card market study (2017) found that while many consumers are engaged and interested in switching to a cheaper credit card provider, some lack the experience to understand the terms in order to compare different cards, and as a result, do not always choose the best option available to them. 

Some consumers simply find it increasingly difficult to pay off the principal of the loan as the repayment costs become more expensive, with the FCA finding that around two million UK consumers are in arrears or default due to credit card debt, while a further two million are in persistent debt and 1.6 million are only making minimum payments.

As a nation, we are taking on more and more unsecured debt. This puts many of us in danger of becoming exposed to further interest rate rises or the economy taking a sudden turn for the worse. 

The impact on work

Financial worries can be a major source of stress for people, and also impact their working life, with our research showing that more than a fifth (23 per cent) of employees say that financial worries affect their work.

Employers are waking up to the fact that they need to provide more education and guidance to employees to help with understanding financial matters to promote financial wellness.

However we can still do much more which requires engagement on both sides to improve things. 

It feels like we are only at the beginning of the financial wellness/wellbeing journey.

The author is Daniel Meehan, Head of Financial Wellness, Benefits Strategy.

This article was provided by Capita Employee Solutions.

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