In the red - Making the case for debt
By Stephen O'Toole on Tuesday, 18 June 2019
In April this year The Guardian reported the number of people in the UK defaulting on their credit card debts soared in the first three months of 2019. Anti-poverty campaigners argue that the recent rise in defaults showed that increasing numbers of households are getting into serious financial difficulties.
But doesn’t this all sound a bit too familiar? Here at Teamspirit we would call it an evergreen news story - one that is always in season no matter the wider economic picture, and especially in the months following Christmas. Our increasingly consumerist society will continue to rack up debt, and it will predictably generate more coverage discussing how it will ever get paid.
Debt is fundamentally miscommunicated and misunderstood. At its simplest level, it is a convenient way to pay for useful things, and we should all do more of that when the price is right. If you look at it in a wider historical context, the general expansion of consumer credit should be hailed as one of the great economic achievements of our time.
Of course, lenders do not offer credit out of the kindness of their hearts - but market conditions, and intense competition for new customers, means there might not be a better time to get in the red. Here I look at some of the most common types of debt that most of us will encounter - and explain the advantages that each bring to both us as individuals and the wider economy:
The desire to be a homeowner is firmly rooted in the British psyche. This conflicts with the approach of our continental neighbours, especially the Germans, who are traditionally a nation of renters. However, unlike other British obsessions, this one does come from a rational place - and can be seen as a true reflection of the benefits of home ownership, both financial and non-financial.
The Bank of England base rate currently stands at 0.75%. This historically low rate has in fact barely moved since 2009, when it was at its lowest level for 300 years due to the global financial crisis. My parents first mortgage in the 1980s came with a whopping 13% interest - first time buyers today can get a 5-year fixed mortgage from a number of high street banks for just 2%. Borrowing hundreds of thousands of pounds from the bank is a daunting prospect for people making their first step on the ladder - but there might not be a better time to do it.
Additionally, other things such as your credit rating will be factored in by lenders when assessing risk - so it actually pays off to have a long track record of credit use when making your first move into property.
But what about the other benefits of home ownership which are less immediate or tangible? This British obsession really derives from the desire to achieve long-term financial security. One of the few good things Margaret Thatcher introduced during her time in office was the “right-to-buy” revolution, which gave council tenants the opportunity to buy the homes they were living in at a generous discount. More than two million council tenants - many of them traditional Labour voters - took advantage of it. Mortgage debt has allowed ordinary working-class families up and down the country to own an asset which increases their social mobility and the future prospects of both themselves and their children.
Credit cards are best enjoyed by the disciplined, and if used responsibly have a whole host of benefits over and above their obvious convenience. But the average UK household has an average unpaid balance of £2,688 on their plastic.
However, retail sales have bucked the trend in an economy otherwise affected by Brexit uncertainty. Analysts have pointed to rising employment and wages, combined with low interest rates, as providing a benign financial backdrop for most households.
In reality no one should be paying interest on credit card debt - even those with balances in the thousands. Because of the competitive nature of this market, balance transfers are on offer from dozens of providers. This allows those who have racked up significant debt to consolidate all their balances onto one card - usually for a small fee and with a 0% interest rate sometimes climbing up to 29 months. As long as you spread your monthly repayments across this 2-3-year period - and don’t spend on the new card - you can be debt free without paying any interest.
Alternatively, whilst these generous offers are so widely available, you could simply spend and shift your debt to a new card each year - sustaining your credit profile and rating at the same time.
In 2012, David Cameron’s Conservative government increased tuition fees from £3,000 to £9,250 per year. This obviously sparked much controversy at the time, as it broke campaign promises from the preceding general election and coincided with spending cuts to further education.
In fact, The Financial Times reported earlier this year that the average graduate in the UK from a three-year degree carries more than £50,000 of debt and faces high interest rates. At the time it was increased, many argued that it would put off students from poorer families applying for university.
However, it appears the opposite has been true. In 2016, The Guardian noted that the number of disadvantaged students applying to university had in fact increased by 72% from 2006 to 2015. So the predicted impact on social mobility simply didn’t materialise. Graduates do pay interest on loans - but not until they earn at least £25,000, and if you haven’t paid the full balance within 30 years, the debt is wiped.
Martin Lewis of MoneySavingExpert.com has done some significant myth busting around student loans – in fact, he says you can ignore the headline of an average of £50,000 debt on graduation. What matters is what you will repay, not what you owe. He is currently leading efforts calling for the current student loan statement to be scrapped and replaced with a version he has created in partnership with the Russell Group of universities - one that focuses on repayments rather than debt, details how repayments actually work and explains what contributions are made each month and over the year.
Financial literacy and clearer communication
As I said earlier, lenders don’t offer credit out of the kindness of their hearts. Consumers today have a wealth of information at their fingertips that should help them ascertain the benefits and pitfalls of these types of debt - and individuals need to assume responsibility for having a base level of knowledge to help them understand how things such as APR, interest rates or DB/DC pensions work.
But at the same time a heavier responsibility needs to be placed on the financial services industry to improve the way they market their products. Communications can at best be badly constructed and at worst misleading, causing unnecessary hardship and suffering for many of the most vulnerable in society. With the Brexit induced slowdown of the economy entering its 3rd year, many consumers, businesses and investors are no longer able to hold off their plans - so debt will be more important than ever to our economic recovery.
Here at Teamspirit, we work exclusively with financial services clients to make their products and services accessible to more people - turning the complex into the compelling to create deeper, more meaningful relationships between brands and their audiences.