According to the Office of National Statistics, last year UK households borrowed more money than at any other point since the credit boom of the 1980s.
The figures show that British households spent £900 more on average than they received in income during 2017. The total deficit between income and spending for the whole year was £25bn, a staggering number that equates to around 25% of the total annual NHS budget.
The gap between income and spending was funded by debt. Last year, data show the total value of unsecured credit (such as credit cards and payday loans) outstanding across the country climbed to a record high of £205bn, although PwC believes the figure could be much higher at £300bn.
Whatever the final total, it’s clear British households are spending more than they can afford.
Indeed, the ONS believes British households took out £80bn in loans last year but deposited just £37bn with banks. If these figures are correct, it means British households are some of the most indebted in the developed world.
Avoid the debt trap
It may be tempting to use debt to bridge the gap between your income and outgoings, but you need careful before taking on such an obligation.
The problem with debt is that it is easy to accumulate, but difficult to pay down. Today, consumers are swamped with 0% interest credit card deals and financing options, which might seem tempting at first but there’s a sting in the tail. Most banks and finance companies offer these deals because they stand to make more on late payment fees and interest costs when they finally kick in — financial services companies are out to make a profit after all.
Before taking out a loan or borrowing on a credit card, you need to ask yourself if it is affordable. With these credit instruments, you are effectively borrowing from yourself in the future. You need to be sure that you can pay these obligations back when the time comes. If not, you could end up being hit by extortionate interest and late payment charges, which can really add up.
Generally, the average interest rate on credit cards is 20% or more per annum. At this rate, it would take just 3.6 years for an outstanding balance to double. After six years the balance would have increased 170%. This rate of interest is enough to turn a small debt into a crippling obligation in a short period of time.
If you need to borrow, you can’t afford it
The best way to avoid being caught in a debt trap is to avoid borrowing altogether. If you do need to borrow to finance that next big purchase, it’s highly likely that you can’t afford it in the first place, and by borrowing, you’re only stretching your finances further.
If you do have to borrow, make sure you shop around for the best rate and stick to a strict payment plan. Most credit cards don’t charge interest if you pay off the balance every month and as a result, can often be a better option than other forms of credit.