Is Britain in the grip of a personal debt crisis?

Unemployment has fallen and yet debt is rising, with more people asking for help. Chris Bond looks at what is causing the growing personal debt crisis in this country.

There are growing concerns about personal debt levels in the UK. (PA).

The start of January can be a lean time of year – Christmas is over, the weather’s cold and the summer holidays seem a lifetime away.

There’s also the small matter of paying for all the festive food and gifts, with many people borrowing money, or using credit cards to help them out. Which is why the Money Advice Trust (MAT) debt charity is already urging low-earning households to start saving money now in time for next Christmas.

Sign up to our daily newsletter

The i newsletter cut through the noise

Its advice reflects the growing concern at the rising tide of household debt in this country which has increased seven per cent since 2012. In September last year, the Money Advice Service (MAS) warned there are some areas of the UK, including Hull, where more than 20 per cent of residents have debt problems.

Saleem Shafi who works for a debt advice centre in Leeds. (Picture: Simon Hulme).

Credit card debt is a particular worry. Its estimated this now stands at around £68bn, which is an increase of 18 per cent in the past three years, with more people – particularly younger generations – using credit cards to pay for everyday essentials.

With personal debt levels rising again there is growing demand for debt advice amid fears the problem is getting worse.

What is particularly alarming is that even though unemployment has been falling, it doesn’t necessarily mean an escape from poverty.

Mike O’Connor, who recently stepped down as chief executive of Leeds-based debt charity Step Change, paints a worrying picture. “Wages are flat, inflation is rising and the cost of living is going up,” he says. “The level of personal debt is growing and it’s going to be a bigger problem in the future than it is today.”

Saleem Shafi who works for a debt advice centre in Leeds. (Picture: Simon Hulme).

Given that the Bank of England’s own figures put total individual debt at around £1.5 trillion, this ought to set alarm bells ringing among policy makers.

As O’Connor says, debt can become a vicious cycle. “If someone loses their job, or becomes sick or a relationship breaks down, once they’re in problem debt it can be very hard to break out.”

The numbers of people contacting debt charities is increasing, and this isn’t the only worrying trend. Jobs are no longer a protection against debt problems and there is a growing number of people under the age of 40 seeking help.

“Young people are having a tougher time. More of them are renters and rents are going up more than wages and they tend to be in less secure and less remunerated employment,” says O’Connor.

In the last five years the number of people contacting Step Change has grown by two-thirds and though there is help available for people struggling to stay afloat financially, this alone doesn’t provide a solution. “We need more people saving money and more help with loans. The Government subsidises cash ISAs and there needs to be more support for people on lower incomes. We need responsible lending and to ensure people get the help they need when problems arise.”

Saleem Shafi is a former bank manager who now works as operations manager at the Money Buddies and Ebor Gardens Advice Centre in Leeds. He says Leeds City Council, debt charities and other agencies are working hard to tackle a problem that shows no sign of easing. “As a city we’re probably one of the best served in the country and we are at crisis point. We had a situation last year where clients had to wait two weeks to get face-to-face debt advice so if we’re struggling then the rest of the country is too.”

Shafi says debt problems traditionally hit low earners in unskilled jobs. “We tend to see more people who are hit by benefit cuts, work zero hour contracts, or are 
having to do two or three jobs just to keep going.”

However, he says debt is affecting a broader group of people. “We’re starting to see clients who may have had good jobs, like teachers and people in the police force, as well as mid-managers whose jobs keep going through restructures, so people who ten years thought they were insulated from all this are now feeling the pinch all of a sudden.”

Theresa May’s government made a big play of helping those “Just about managing” families – or “Jams” as they’ve become known – however, those working on the frontline say a toxic combination of continuing austerity measures and banks not lending to those on lower incomes is exacerbating the situation. “The austerity measures are driving debt to the point where for a lot of people now it’s not just about managing, it’s just about surviving,” says Shafi.

The scale of the precarious situation many people find themselves in was highlighted in 2016 when it emerged that more than half of all working age people in Yorkshire had less than £100 in savings.

It’s estimated that as many as 16 million people nationally have no savings buffer, while the Institute for Fiscal Studies (IFS) found that people born in the 1980s are only half as well off as those born in the 1970s were at the same age.

There are those who criticise people for living beyond their means in the first place, but the reality is that for many families it only takes a small change in their financial situation to push them into debt and, once caught in that spiral, it can be difficult to get out. “It’s taking people longer to take action on debt issues because there’s still a stigma around getting support and advice,” says Shafi. “People do feel embarrassed about asking for help, especially if they’ve had a good job.

“Clients we see often say they feel guilt and shame, but when we look at the reasons why people get into debt it’s very rarely because they have a gung-ho attitude towards money. It’s normally because there’s been a change in circumstances, either they’ve got ill, they’ve lost their job, their benefits have been cut, or there’s been some other emergency.”

Problem debt often has a devastating effect on people trying to make ends meet. It can trigger an increase in stress levels and has a detrimental effect on mental health which in turn impacts on health services at a time when mental health provision is already under resourced.

The Ebor Gardens Debt Centre has been running for the last 30 years and in 2013 launched its Money Buddy scheme – a free, independent service part-funded by the National Lottery to help people stay out of debt and manage their finances.

It has proved successful, offering a free drop-in service for those with debt issues in centres across the city and the hope is a national network can be created.

Shafi sees this issue as a national crisis. “We now have Money Buddies in Wetherby and to have one there and somewhere like Otley is indicative of the problems that are here already but are about to get even worse.

“I think this is really going to hit the middle classes in the next five years or so. People might think debt is bad now but I can only see it accelerating.”

Country sinking deeper into red

Borrowing on loans, overdrafts, credit cards and car finance has accelerated since 2011.

Overall debt, including mortgages, now stands at £1.5 trillion, which equates to an average of £28,000 for everyone over the age of 16 in the UK, and is expected to reach £2 trillion by 2020.

New research, published yesterday, suggests that at least one-quarter (28 per cent) of adults in Yorkshire with common credit products – including mortgages, bank loans and Personal Contract Purchase car loans – could find it difficult to repay their debt if interest rates were to rise by one percentage point, according to a survey of over 2,000 British adults by insolvency trade body R3 and ComRes.