Family debt levels up 48%
The average UK family now owes £7,944 in unsecured debt, up 48% from £5,360 this time last year.
This debt accounts for 32% of the average annual household income (£24,792).
The figures, from Aviva's latest Family Finances report, highlight significant levels of borrowing on credit cards, personal loans, overdrafts and store cards. Credit card debt accounts for the largest portion of unsecured debt, with households owing £2,314 on average, followed by £1,739 on personal loans and £775 on overdrafts.
Louise Colley, spokesperson for Aviva, says borrowing money has become a fact of life for many: "Families are now used to living with a certain level of debt; however, it has continued to increase over the last 12 months.
"As long as people are able to service their debts they remain manageable, but borrowings can be another layer of pressure on a family's finances," Colley adds.
The survey also reveals that while average household income has risen slightly over the past year, the increases are not enough to keep pace with inflation. A typical family's income has increased by 4% over the past quarter, while inflation is currently 4.2%.
Over a longer timeframe, the average household's annual income has increased by 7% and now stands at £2,066 a month. In comparison, the average childless couple has seen a 10% annual increase in their earnings, now bringing home around £2,220 a month.
TV beats life insurance
Aviva's report also shows that there are more families (50%) paying for a monthly satellite TV package than there are paying for life insurance (40%).
In addition, more UK families have taken out pet insurance and mobile phone insurance than they have critical illness cover or income protection.
Colley warns families against making cutbacks on essential financial products such as life insurance: "By choosing to bury their heads in the sand and ignore these subjects, people potentially risk making a bad situation worse."
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.