Drowning not Waving: Middle Class Debt is Rising
The average household in the UK now owes unsecured debt of £14,540, according to TUC figures.
The amount — owed in bank overdrafts, personal loans, store cards, payday loans and outstanding credit card debts, as well as student loans — rose to £407bn in the third quarter of 2019.
It’s the first time it has exceeded £400bn and it now accounts for 27.5% of household income — the same record high that it reached in 2008 at the outset of the financial crisis.
Despite weak wage growth and rising prices, consumers are continuing to spend by racking up more debt.
These households are not those just on very low incomes. Debt is becoming an increasing problem among the middle class earning above-average salaries as they turn to high levels of borrowing to fund their lifestyles.
If your debts are worrying you, there’s a route to becoming debt-free. Here are some of the options:
Some restructuring of your borrowing might be enough to get you back in control. If you’ve been overspending on credit cards you are likely to be paying interest on this debt of around 21%.
You can cut the cost of this borrowing entirely by transferring the debt to a balance transfer card where the interest rate is 0% for a set period.
Check a comparison site to see if you can find one with a term long enough that you can repay it all — the longest at the moment is 28 months.
However, it’s worth considering the shorter terms as they often come with zero balance transfer fees rather than the typical 2%-3%. Paying zero interest means you can channel all your repayments towards clearing your debt rather than lining bank’s coffers.
If your debts need more than a simple re-jig, you need to take a more formal course of action.
Debt advice is best sought from a debt charity which will advise you, and act on your behalf, with nothing to pay for their services. Beware of debt help or loan consolidation companies that market their services heavily.
They will charge for advice and these fees will only serve to add to your existing debts.
Getting help from a debt charity will have an immediate benefit. As long as you can prove you have sought debt help or can show you are trying to repay your debts using a self-help tool, debt collectors won’t contact you for at least 30 days thanks to an agreement between the Government and the Credit Services Association, which represents debt collection companies. This gives you a month to work out the best solution.
There are several options available to those whose debts have spiralled out of control.
A debt management plan
This is an agreement between you and your creditors to pay your debts. They are usually for those who can only afford to pay back a small amount each month.
An adviser will work with you to establish what money you need to live on. Any money left over will be consolidated into one monthly payment to your debts.
Your plan can be cancelled if you don’t keep up your repayments so you need to make sure you can afford the agreement or you will be back to square one. Since you’re making reduced credit repayments, your credit rating will be affected.
Debt Relief Order
A debt relief order might be the answer. It freezes your debt repayments and interest for 12 months. If your financial situation hasn’t changed at the end of this period then all of the debts included will be written off.
As well as your debts not exceeding £20,000, you must have less than £50 a month spare income and own less than £1,000 worth of assets, which includes any car you may own.
You can’t apply for the order yourself – you must apply through an authorised debt adviser. There’s an administrative fee of £90 to apply, but in some cases, a charity may be able to help you with the cost. The DRO will stay on your credit record for six years.
Individual Voluntary Agreement (IVA)
For more serious cases there’s an Individual Voluntary Agreement (IVA). An IVA allows you to make reduced debt repayments over a specific period and prevents your creditors from taking you to court. For the IVA to go ahead, creditors holding 75% of your debts must agree to it.
If it goes ahead, it will apply to all your creditors, including any who disagreed. There are usually two fees for an IVA – one is a set-up fee and the other is a handling fee which will be applied each time you make a payment. According to Citizens Advice, fees are in the region of £5,000 on average. So this is not for those with small debts to consider. An IVA will stay on your credit record for six years.
Bankruptcy is a legal procedure for people unable to pay their debts, that involves sending an application to the Insolvency Service with details of what you owe and your income.
If the application is successful, all unsecured debts will be written off and your creditors will no longer be allowed to pursue payment. Any assets you have would be sold off and there are quite severe financial restrictions during the bankruptcy period.
There are fees of £680 to become bankrupt. You’ll pay an adjudicator fee of £130 and a deposit of £550. You will be added to the Individual Insolvency Register and details of your bankruptcy will stay on your credit record for six years.
Time to get help?
The best thing to do with debt is to get it under control — and the earlier the better.
- National Debtline – ( 0808 808 4000),
- StepChange Debt Charity – (0800 138 1111)
- Debt Advice Foundation – (0800 043 40 50).
First published by our friends at Compare the Platform: