Debt is like any other trap, easy enough to get into, but hard enough to get out of.
I don’t want to alarm you readers but debt is not something to take lightly. Not only does it cause untold stress and significant upset to those affected, but it’s also lining the pockets of the credit card companies. Read on…
Debt – A Win-Win for Credit Card Companies
Credit card companies have, according to PwC, increased their gross profit margins to 17% in 2014, compared to 16% in 2009. This may be an indication that UK consumers are less worried about their level of borrowing and ability to repay the debt, which in itself could be an indication of confidence in the economy.
UK households are in debt to the tune of £8,936. This unsecured debt is set to increase to £10,000 by the end of 2016. The amount of unsecured debt in the UK increased by 9% or £19.7b last year which is the fastest increase for more than a decade. This means that the debt mountain is greater than the pre-financial crisis peak.
Low Bank Rates ‘Sucker’ Consumers Into Debt
The cheap mortgage culture has lulled home buyers into a false sense of security by making new borrowings seem especially affordable. PwC believes that consumers are being ‘suckered’ into debt by abnormally low bank rates, which do not reflect long-term rates at all. The implication is that many will be wiped out because they become over-stretched when interest rates rise again.
In the event that interest rates rise, the average family will need to find an additional £1,000 each year to service their mortgage and unsecured debt. This assumes only a 2% rise in base rates and is only the cost of the interest, not repayment. That 2% rise would mean the repayments on a typical £120,000 mortgage would rise by £200 per month.
As we have heard so often during the last five years, the sun is beginning to shine, so it is time to fix the roof.
“Chains of habit are too light to be felt until they are too heavy to be broken.” – Warren Buffett