Over a quarter of consumer credit in the UK is credit card debt. With interest rates set to rise as early as November, savvy UK consumers are looking to cut borrowing and pay off outstanding balances.
Bank of England data Household debt and Covid compiled in the second quarter of 2021, shows that total UK household debt just before the pandemic hit in March 2020 was equal to 123% of household income, after excluding student loans. This was less than the 145% burden borne by households when the 2008 global financial crisis hit.
Most of the debt is in the form of mortgage debt, at 80%. The rest is made up of consumer credit.
Consumer credit includes loans, credit card debt, and overdrafts and is also known as unsecured debt.
Unsecured debtors more exposed to the Covid crisis
The BoE report found that households with unsecured debt were more exposed to the Covid crisis, with low to middle income households seeing their incomes drop more consistently – they may have taken on additional debt.
The bank also found that in general, households with mortgage debt tended to have higher income than those with only unsecured debt. Household members with a mortgage are also more likely to be employed.
See the table below:
Households with unsecured debt (consumer credit) are also more likely to have seen their incomes decline at the worst of the pandemic, reflecting the impact of lockdowns on those in less secure jobs and in low-income sectors. income such as hospitality.
The latest data from Money Charity shows that the average total unsecured debt owed by a UK adult is £ 3,734; 28% (£ 1,067) of that is held on credit cards, the most expensive form of debt to repay.
Money Charity says it will take 24 years and nine months to pay off average credit card debt, assuming the debtor has made minimum monthly payments on monthly interest plus 1%.
Bank of England could raise interest rates in November
The next meeting of the BoE’s monetary policy committee on November 4 could see interest rates rise to 0.25% from 0.1% currently. That would still leave rates at low levels by historical standards, but it’s a huge leap in the context of the last decade and more low rates.
Policymakers are increasingly concerned that inflation could become entrenched in the economy as wages rise to keep up with the rising cost of living, leading companies to raise prices to cover the additional costs involved. to the payroll.
But the increases are highly unlikely to end this year. The Bank expects inflation to peak at 4% in April, but the market is already forecasting inflation of up to 6% in 2022. As a result, in trying to control inflation rates, inflation rates will have to continue to increase, probably at least 1%.
Bad News for Mortgages and Credit Cards
Suffice it to say, this is very bad news for debtors, although lenders will welcome higher borrowing costs as they earn more on their savings after years of drought yields.
Overdrafts, credit cards and loans will all see rates go up.
Those with variable rate mortgages will also be hit hard.
For example, if you have a mortgage of £ 100,000 with 15 years remaining, are currently paying 2.5% interest and the rate has increased 0.25%, that would add £ 11.83 to your monthly payment. .
What Debtors Can Do Now to Ease the Pain of Rising Interest Rates
Credit Card Debt – Pay Earlier, Transfer Balance, Consolidate, Cut
- Credit cards are often the most expensive form of debt (averaging 20% APR) that consumers can incur. One way to reduce the charge for reimbursement is to look for 0% balance transfer offers, but avoid excessive transfer fees.
- Another thing to think about is choosing to pay off more than the minimum if you can afford it, to pay off the debt faster.
- Alternatively, if you have one or more credit cards, consolidate the debt with a lower rate loan than credit cards by choosing to pay off the debt faster, if you can afford it.
- You can also cancel a card, which means you keep the old rate but must clear the balance within 60 days.
- After you’ve paid off credit card debt, reduce it!
Avoid Buy Now Pay Later services
Buy Now Pay Later (BNPL) services are growing in popularity, but these debts can quickly get out of hand due to the ease with which debt can be incurred. BNPL is a costly form of debt, with market leader Klarna charging an 18.9% APR. Avoid these services by forgoing this supposedly “must-have” purchase for clothes you could probably do without.
Use an individual voluntary agreement to reschedule your debt
Individual Voluntary Arrangements (IVA) are an agreement you make with your creditors to reschedule your debt. An insolvency practitioner determines what you can afford to pay. With your consent, the practitioner then distributes this money among the creditors.
A debtor will need to choose an insolvency practitioner to obtain the services of a VAT.
The deadline for completing the repayment will also be set and for payments to begin, creditors will first have to accept the debtor’s proposal.
If there is more than one creditor involved, which is often the case, the IVA goes into effect if the creditors holding 75% of the debt accept the IVA.