The average UK household is set to owe close to £10,000 in unsecured debt by the end of 2016, more than ever before in cash terms, according to PwC’s latest report on the Consumer Credit market, Precious Plastic: How Britons fell back in love with borrowing, published today.
Total outstanding unsecured borrowing grew by nearly £20bn in 2014 or 9%, its fastest rate of growth in at least a decade, to reach £239bn or close to £9,000 per household last year, surpassing, in cash terms, its pre-financial crisis peak.
The report suggests that while most Britons are currently in control of their borrowing, and in their ability to remain so, there could be challenges ahead. The total household debt (including secured debt) to income ratio is projected to reach around 172% by 2020 – exceeding its previous peak in the run up to the financial crisis. This increase, coupled with UK household’s vulnerability to interest rises, could leave households over stretched. For example, PwC analysis indicates that a 2% point rise in interest rates on total household debt (including secured debt) would leave households needing to find an extra £1,000 a year just to cover the additional interest costs.
Simon Westcott, a director in PwC’s financial services practice, commented: “Underlying this significant growth in overall unsecured borrowing, we also saw changes in the way people borrow. Old favourites such as credit cards are staging something of a revival, while newer forms of borrowing such as peer-to-peer lending are starting to gain ground
“Despite our survey revealing a relatively high degree of confidence among consumers about their ability to stay on top of their debts, affordability of the UK’s household debt pile may come under pressure in the coming years.
“As the total household debt to income ratio heads towards 172% – exceeding its previous peak in the run up to the financial crisis – and interest rates increase, consumers could begin to feel squeezed once again. This could undermine growth for lenders and feed through to resurgence in bad debt.”
Of the £19.7bn increase in unsecured borrowing in 2014:
- £9.1bn (around 46% of the increase) came from student borrowing, PwC estimates that graduates who started university after 2012 could leave with an average debt of £40,000-£50,000
- £4.2bn (around 22% of the increase) came from credit cards. Total outstanding credit card debt saw rapid growth in 2014, rising above £60bn for the first time since 2011
- £6.4bn (around 32% of the increase) came from other sources, for example personal loans and overdrafts.
Consumer credit confidence
A joint PwC/YouGov survey of around 2,000 Britons’ attitudes towards debt reveals that most people feel confident about their finances. Britons’ confidence in their ability to stay on top of their debt has improved, with only 18% of people worried about how they will make future repayments, down from 26% in our last survey.
Consumers are less worried about their job security than they were in our last survey, with just 13% concerned they may lose their job in the next 12 months, down from 16% in 2013 and 20% in 2011. While just over a quarter (26%) expect their pay to be frozen or decreased over the next 12 months, down from 48% of people in the aftermath of the crisis (2010).
The survey also shows dependence on credit to pay for essentials such as food and household bills has fallen to its lowest level since our survey began, with only 12% having done so in the past 12 months, down from 15% in the aftermath of the crisis (2010)
Against these more optimistic findings, the PwC/YouGov survey also includes some warning signals. For example, dependence on credit for essential items increases significantly among 35 to 44 year-olds, with close to 20% borrowing simply to make ends meet.
In addition, the research shows many Britons routinely misunderstand the true cost of debt. For example, when presented with a number of options, just 21% correctly estimated the cost of a mortgage. Low levels of financial literacy leave many Britons at risk of taking on higher levels of debt without fully understanding the true cost.
Simon Westcott, a director in PwC’s financial services practice, concluded: “With unsecured borrowing showing strong growth, bad debt levels receding to pre-crisis lows and funding costs remaining relatively low, credit card issuers are seeing strong margins and profits.
“However, the credit card industry faces a number of challenges in the coming years – including a potential resurgence in bad debt, regulatory scrutiny of their business model, and reduced appeal to younger borrowers. They should seize this opportunity to innovate and reinvent themselves from their current position of strength.
“Credit card issuers also face regulatory scrutiny over the potential reverse “Robin Hood” cross subsidy that may exist in the product, where in the absence of annual fees, a relative minority of customers who regularly pay interest – perhaps those with less means and / or financial literacy – enable the rest to enjoy the benefits of a credit card for low or no cost.
“While it may not feel like a positive step to many consumers, the reintroduction of annual fees – common in many other markets – would be good for both credit card issuers and customers alike because it would simultaneously help to address the cross subsidy question and also diversify issuer’s sources of revenue, leaving them more resilient to changes in the economic cycle.”
In an exclusive video interview with Professor Steve Keen he explained how private debt is driving the UK’s so-called economic ‘recovery’.