Unsecured debt soars by 40% to nearly £6k per person
The average Brit is in debt by £5,898, up 41% over the past year, analysis has revealed.
Collectively we now owe an incredible £196 billion – up from £139 billion this time last year – in unsecured debt, spread across credit cards, overdrafts, personal loans, store cards, or finance agreements.
The most indebted age group is made up of those aged between 18 and 34. They have seen their debts almost double within a year from £5,446 to a worrying £10,058, while those aged between 35 to 54 saw their debts increase from £4,139 to £5,211.
The research from MoneySuperMarket raises concern that the apparent improvement in the economy is being fuelled by unmanageable credit card spending and other forms of borrowing.
Only 36% of borrowers think they will be able to pay off their debts within a month, while 24% think they will clear their debts within a year and 14% believe they will still be in the red for the next two to five years.
Dan Plant, consumer expert at MoneySuperMarket, said: "This research begs the question whether the economic recovery being celebrated by politicians is simply based on a rapidly climbing debt time-bomb.
"Not only are personal debts up by 40% across the board - with under 35s worryingly seeing what they owe more than double in just a year – they are being paid off more slowly than a year ago.
"This suggests the British public may be robbing Peter to pay Paul, with the increased consumer spending we've witnessed just a by-product of this – which would be hard to sustain. It was borrowing at excessive levels that was one of the contributing factors to the economic crisis so we must hope we aren't witnessing a repeat of mistakes of the past."
Meanwhile, the Institute of Financial Studies has reported average hourly wages in 2014 were 4.7% lower than they were in 2008, with those aged between 22 and 29 the worst affected with a 9% drop.
An overdraft is an agreement with your bank that authorises you to withdraw more funds from your account than you have deposited in it. Many banks charge for this privilege either as a fixed fee or charge interest on the money overdrawn at a special high rate. Some banks charge a fee and interest. And other banks offer a free overdraft but impose very high charges for exceeding the agreed limit of your overdraft.
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.