Derin Clark

Derin Clark

Online Reporter
Published: 16/01/2020

Following the news yesterday that low-income households are facing the fastest rise in consumer debt since the financial crisis, we have taken a look at how consumers can become debt-free in 2020.

When looking at clearing debts, we are looking at unsecured, personal debt such as credit card and loans. This does not cover secure debt or mortgages, but our guide How to pay off your mortgage early does offer some tips on clearing mortgage debt.

These tips are also aimed at those with manageable debt. Consumers who are struggling to repay debts, meet minimum repayments or who are missing bill payments, should seek debt advice from Citizen Advice or a free debt charity.

Consumer debt is being used by low-income households at the fastest rate since the financial crisis over a decade ago, research published by the Resolution Foundation reveals.

The research, which was published today, found that while overall consumer debt levels had remained below pre-financial crisis levels (15% of total income in 2019 compared to 19% in 2008), the proportion of low-income households using some form of consumer debt rose by 9%, from 53% to 62%, between 2016 and 2019 (the same rise that was seen between 2006 and 2008). This compares to just a 1% increase, to 64%, in consumer debt among high-income households.

While the overall debt among high-income households is higher, this debt often includes mortgage debt, which those on low incomes are much less likely to have taken on. Those with mortgage debt will have benefited from high competition among mortgage lenders, which, despite some average mortgage rates having increased since 2017, have remained low. Research from Moneyfacts.co.uk found that the average two year fixed mortgage rate on a 75% loan-to-value (LTV) has risen from 2.12% in December 2017 to just 2.30% in December 2019, while the average five year fixed mortgage rate on a 75% LTV has actually fallen from 2.65% in December 2017 to 2.58% in December 2019.

While mortgage rates have remained low, rates on other forms of debt have increased in recent years. For example, research from Moneyfacts.co.uk found that within two years, the credit card purchase APR has increased by 2.1%, from 22.9% December 2017 to 22% December 2019.

Resolution Foundation has also found that there has been a 15% rise in the share of low-to-middle households who have no savings, leaving many low-income households far too exposed to future financial shocks.

Commenting on the report, Kathleen Henehan, a policy analyst at the Resolution Foundation, said: “Britain is a long way from the levels of debt that drove the financial crisis, despite repeated claims to the contrary. Falling mortgage costs have also reduced the costs of debt for many, mainly higher-income families. However, the use of often high-cost consumer credit has risen over the past decade, particularly among low-income households.

“Access to new credit can be hugely beneficial for low-income families, but with many also reporting that they have no savings to fall back on, these high debt repayment pressures are a sign of stretched living standards.

“The risk is that this leaves them far too exposed to future financial shocks, reinforcing the need for policymakers to focus on the living standards of those on low and middle incomes.”

A high number of consumers are expecting to retire saddled with the burden of thousands of pounds of debt, a new study from equity release firm Key has found.

According to the study, more than one in three people are expecting to retire with an average debt of £17,460 this year. Of those in debt, 48% still owe money on credit cards, 31% have an outstanding bank loan and 14% are still paying off their mortgage. The study also found that while the average amount of debt owed is £17,460, 8% owe over £20,000 and 4% do not actually know how much they owe.

This year, the State Pension Age is due to start moving to 66 for both men and women, which should mean that retirees have had an additional year to save into their pension, however with so many expecting to retire with high levels of debt, it could negate the financial benefits of retiring a year later. Ideally, those entering their retirement should be aiming to start their work-free life in as strong a financial position as possible. There are ways to top up pension funds with additional income when retiring, such as equity release, however it is important to understand these often come with a risk and it is vital to seek independent financial advice before making such a significant decision.

Will Hale, CEO at Key, said: “With changes to the state pension due to start coming into effect this year, it is vitally important to understand the challenges and aspirations of the “retirement class of 2020”. Today’s findings suggest that while most people work hard to retire debt-free, this is not the reality for one in three people who need to consider how they can service and repay over £17,000 in borrowing from their retirement nest egg. Even those with generous incomes may find this a stretch and people are taking an average of three-and-a-half years to clear the debts they retired with – at a time when they should be enjoying an active retirement and worrying less.

“Equity release is not right for everyone, but it is vitally important that people are not prevented from considering how their largest asset, their home, can support them in retirement by misconceptions and unanswered questions concerning later life lending options. There is a lot of help available online on how to budget for retirement and working with a financial adviser in the run-up to retirement can make a massive difference in being as retirement ready as possible.”

Over the coming weeks, consumers across the UK will be receiving their post-Christmas credit card bills, which for many will be uncomfortable reading.

In fact, according to the debt charity StepChange, 33% of British consumers planned to use credit to pay for part, or all, of their Christmas spending this year. In addition to this, it will take the average person seven months to pay off their Christmas debt, meaning that it will take until summer for the debt to be repaid. Fortunately, there are steps borrowers can take to make repaying Christmas debt manageable.

A recent survey conducted by YouGov on behalf of Pepper Money has revealed that nearly four in 10 (39%) British adults admit to having missed more than one credit payment against a debt, with this reducing to three in 10 (31%) of those aged over 55.

The research also showed that younger borrowers between 35 and 44 years old are more likely to have missed several payments on a credit card or loan.

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