It was reported recently in the national press that people have stopped borrowing money on personal loans and credit cards because they are paying off their debt.
This is a conclusion which is unfounded in my opinion. The error comes from journalists and over optimistic politicians who want the situation to be true, however, I suspect the truth is a lot darker in nature.
The Facts
£351 was borrowed in August 2012, considerably less than the same time last year. At the same time, people continued to make payments back to their contractual debt agreements. At first glance this could be considered extremely positive. People are borrowing less, continuing to pay back their debts and getting themselves, and the country, into a better financial position.
Have we ‘jumped the gun’ on suggesting this is all good? Is there a deeper element we’re not considering? Could this actually be the eye before the storm?
Well, despite the dramatic lead up, I think people who have outstanding debt may well be struggling to afford to repay their debt.
My Opinion
The statistics state that fewer credit cards and unsecured debt was borrowed while money continued to be repaid to existing debts. The summary then suggests people don’t want debt and are trying to repay their debt. However, with unemployment still high and rising living costs, how can people now be able to repay more money to their debt than before.
The truth is that based on the numbers, it’s not that people are paying more back to their debt, which we would be led to believe. It’s that people are not borrowing as much, so comparatively, the amount of money being repaid is a higher overall percentage.
People are like ducks on the water. Above the water the duck is enjoying the surroundings and going about its daily business. But, below the surface, the ducks legs and moving at a rapid pace just to keep it afloat. The average person in the UK owes around £10,000 in unsecured debt, which doesn’t include their mortgage. So, does this mean people are now simply paying this debt off?
Standard practice would see people switching and changing their credit arrangements to take advantage of the best deals. For example, an introductory 20 month interest free period where credit card debt could be switched from one provider to the next. This way people can avoid the difficult interest payments for a little longer.
Credit Industry
The credit industry is incapable of lending to the same levels as it once did. In fact, it’s become extremely difficult to obtain credit cards, overdrafts and loans because of the current financial situation.
If this is the truth, then stricter criteria to obtain credit would be the overall reason for the number of people taking out less credit. it’s not that people don’t want credit and consequently, want to pay back their debt, it’s that the availability of credit is no longer available to them.
£10,000 per person can’t magically disappear. People have to repay or deal with the debt some way. If they can’t get the credit they require to buy more time then interest, and potentially charges, will be added to their unsecured debt each month.
Converse to what was published in the national press, I believe the statistics suggest people are struggling to survive and the life raft they had with switching their credit provider, is slowly drifting off.
Ultimately, people will either sink or swim now. Those who sink may face Bankruptcy and those able to swim will spend a large percentage of their life struggling to repay the debt, with many simply managing to meet the interest and charges only.
John The Bankruptcy Guy
As an ex-bankrupt, John has experienced the highs and lows of credit. It's with this knowledge that he writes Debt Advice Resource - to help others avoid, or navigate out of, the pitfalls of debt.
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