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Debt bubble sets homeowners back to 2008 crash

Monday 10 July 2017

Charities and financial advisers are calling on the government to address the “bubble” of unmanageable debt that households are rapidly accumulating.

Unsecured consumer credit – including credit cards, car loans and payday loans – is this year expected to hit levels not seen since the 2008 financial crash.

There has been concern in the Bank of England that consumer spending is being underpinned by debt, amid comparisons to the run-up to the financial crash. In addition, recently published figures show inflation reached a four-year high in May, meaning shopping is becoming increasingly expensive, further intensifying the squeeze on household budgets.

The Bank of England’s monetary policy committee recently took the decision to put interest rates on hold, which took City analysts by surprise as three of the eight committee members voted to raise them. Analysts had expected only one member to support the rise, which would have pushed up the costs of mortgages and other credit for many borrowers and lead to further repayment problems.

Debt advisers are urging the government to make good on their manifesto promise to introduce a scheme where those in serious debt are protected by law from further interest fees, charges and enforcement action for up to six weeks. However, many campaigners have argued that it should be extended further, to up to a year.

Peter Tutton, head of policy at debt charity StepChange, said:

“It would be excellent if the government committed to helping households who are struggling with debt. It really is one of the great problems of the time that politicians have to grapple with. We are seeing more and more households struggling just to make basic ends meet – to pay their rent, to pay their council tax, to pay their gas bill. We would like to see the government say, ‘we need to do something about this’.”

Tutton said that while there was generally more credit available to consumers, the interest rates were not necessarily cheaper. “There is a picture here of a large group of households struggling with their fingers on the edge,” he said. “Credit is becoming more available. Our worry is that if households are already vulnerable, you put those two things together and it creates a different problem.”

The charity estimates that 2.9 million people in the UK are currently experiencing severe financial debt.

Sara Williams, a volunteer adviser at charity Citizens Advice and author of blog, Debt Camel commented:

“The recent large increases in consumer credit ... look alarming to debt advisers – very much like a bubble building up.”

Martyn James, from online complaints service Resolver, stated that the website had seen a sharp rise in the number of grievances about financial difficulties over the past few months. “There is a large amount of credit out there and a large [number] of people who are trying different types of credit as a way to keep afloat,” he said.

Store cards in particular appeared to be re-emerging as a problem, James added. These cards are often offered with incentives by retailers, such as an introductory discount at point of sale, although interest rates tend to be far higher than on normal credit cards.

“Undoubtedly, there are huge numbers of people relying on credit and we are hearing that many of them are concerned that they will not be able to pay if interest rates go up slightly, or if there is a rise in their mortgage rate. So people are very much up to the line,” he said.

The Financial Ombudsman Servicecorrect reported last month that complaints about payday loans had risen sharply, and were nine times higher than two years ago. It received 10,529 new complaints about these short-term credit products in the 2016-17 financial year. This was a rise from 3,216 complaints during the previous year.