Average family nearly £8,000 in debt
UK families have among the biggest debts in the world, owing an average of £7,900 in personal loans, overdrafts and credit cards, according to a report from PricewaterhouseCoopers (PwC).
Its Precious Plastic report shows that while British families have spent the last three years paying off their debt - reducing it by an average of £355 last year - they are still among the most indebted in the world.
Simon Westcroft, director of PwC's financial services practice, says: "Although the UK government's austerity drive appears to be hitting home, with households paying off an average of £355 worth of their debt in 2011, three years of austerity by UK consumers has only made a small dent in the total levels of borrowing."
The report also shows that the way we borrow is changing. Credit card borrowing fell by 5% last year and consumers cancelled nearly a million cards, taking the number of credit cards in circulation down to levels not seen in almost 10 years.
"45 years since it was first introduced, the credit card is suffering a mid-life crisis," says Westcott. "The longer term trend suggests that numbers will continue to decline, with the younger generation showing a preference for debit cards and emerging digital alternatives such as mobile payments."
The report warns that young people are increasingly turning to payday lenders to borrow rather than the traditional options of credit cards and overdrafts. "Mainstream lenders need to be aware that what may have begun as a last resort could be an enduring relationship as consumers are pleasantly surprised at the convenient and innovative service they receive from these smaller, more agile providers," warns Westcroft.
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.