UK Households are borrowing more than saving for the First Time
The Office for National Statistics (ONS) has revealed that last year, for the first time since records began in 1987, UK households are borrowing more money than they are putting aside in savings. Saving levels among UK households are the lowest they have been since 1963, with consumers setting aside just 4.9% of their income on average. This is an even lower rate than the previous low in 1971, when the average stood at 5.2%. In response to this revelation, a spokesperson from the debt charity, StepChange, commented “Far from being a nation of savers, we’re now a nation of borrowers.”
Short-term Borrowing Increases
The way in which this “nation of borrowers” uses credit is changing too. Credit card use increased by 8.3% over the course of February – the highest it has been since before the 2008 financial crisis. Credit card use in particular is rising much faster than other types of credit, including personal loans and overdrafts, suggesting that short-term borrowing is becoming more popular. This could be bad news for consumers, since this kind of borrowing is the most expensive – with the average credit card hosting an interest rate of 19% APR, paying off balances with minimum payments can take decades, and cost hundreds of pounds in interest. These payments seem to be collectively getting on top of consumers, as the average household income accounted for only 75% of average household debt last year, according to statistics from the ONS.
Lenders were warned, at a recent credit conference, that many consumers were struggling to keep up with their repayments. Jonathon Davidson, of the Financial Conduct Authority (FCA) announced that a “significant number of households” could be “in over their heads” when it comes to debt. Many consumers who could just about manage their payments initially could fall into arrears if an unexpected expense were to crop up. He warned lenders to check more carefully whether or not potential borrowers could manage repayments sustainably, pointing out that “a business model based on customers who can’t afford to pay you back is hardly a long-term strategy for success”. Citizens Advice agrees that further regulation should be introduced to help customers struggling with debt – especially when it comes to short-term lenders, such as so-called ‘doorstep loan’ providers.
Pressure on Household Budgets
The historically low saving to borrowing ratio seems to be the result of the low interest rates offered to savers, and the pressure put on budgets by years of stagnant wages and inflation. As incomes are stretched further, evidence is emerging that many are cutting back. Domestic demand for cars fell by 17% between February 2017 and February 2018, according to the Society for Motor Manufacturers and Traders.
For many households, though, cutting back is not enough, and borrowing to make ends meet is not optional. Citizens Advice revealed last month that borrowing out of absolute necessity continues to be a nation-wide problem. According to the service, workers employed in zero-hours or part-time work are five times more likely to turn to high-cost credit to plug gaps in their income. 21% of people with a volatile income also reported going without food or other essentials to make sure their bills were paid in 2017. This is not a niche problem, as 13% of UK adults report an income which varies from month to month, thanks to the rise of the ‘gig’ economy. Citizens Advice is urging the short-term credit sector to introduce more stringent regulations, to make sure people can afford their interest payments, and do not end up trapped in unmanageable debt.
It’s not all Bad News
Despite the worryingly low rate of savings, and high levels of debt, hope is in sight for UK households. The Bank of England is expected to rise the base rate in May, which could give savers a boost if these higher rates are passed on to savings accounts. If consumers are encouraged to put money aside, the number of households with emergency funds set aside could increase, reducing reliance on credit overall. As well as this, the ONS predicts that the UK economy as a whole will grow by 1.8% over the course of 2018, up from their earlier prediction of 1.7%. As well as this, both the minimum wage and the national living wage are set to rise this month, following the Chancellor, Philip Hammond’s, autumn budget announcement. The new national living wage has risen by 4.7% (since last year) to £7.83. This wage is mandatory for all employees over the age of 25. Wages for employees under 25 have also risen, to £7.38. It is hoped that this rise will reduce the strain on the budgets of 2 million UK workers. It is worth noting, however, that the national living wage still falls below the independently calculated Real Living Wage. This wage is worked out by the Living Wage Foundation, based on the current costs of essential goods and services, and stands at £8.75, or £10.20 for workers in London.