Battling The New Year Debt Hangover

BetterAskAdam.com
Jan 3, 2024
5 min read

Updated: Jan 4, 2024

1 in 5 people across the UK could still be paying off Christmas debt up until Easter, as the cost of living crisis and inflation forced prices higher over Christmas [8]

Almost 1 in 10 people (8%) have had a direct debit, bill or standing order they have been unable to pay in the past month, rising to 10% of those aged 16 to 29, and 13% of those aged 30-49, according to the Office for National Statistics

Dame Clare Moriarty, the chief executive of Citizens Advice issued a stark warning about the dangerous levels of debt many families are facing: “With so many households already on the financial ropes, buy now, pay later borrowing for extra Christmas costs risks delivering the knockout blow.” She said: “Consumers are being failed and as a result could see 2024 plagued with unmanageable debt, poor credit, and bailiffs knocking at their door.

The picture of the problems with debt certainly paint a stark picture for millions of people. But the common reaction of some - that you shouldn't spend what you don't have and that stricter budgeting might help is neither helpful or accurate for many families.

In fact, high income households are most likely to hold debt, particularly property debt, because taking out large loans like mortgages requires a high income and savings. So the first thing to understand is that the level of debt is not the key measure here, it is the degree to which that debt is manageable. And it is true to say that low income households are more likely to be over-indebted compared with their ability to fund their loans. [5}

The Debt Picture

6.5 million people expected to struggle to heat their homes sufficiently over Christmas, while 2.7 million will have to choose between buying food or presents.[1] Research by the Joseph Rowntree Foundation [4] shows a fifth of low-income families – 2.3 million – need to take on new lending just to pay their rent or energy bills.

More than 24 million UK adults – 40% of the UK population – plan to use credit to pay for Christmas presents this year. Of these, 12 million plan to use credit cards, while 4.7 million will turn to buy now, pay later plans to stretch the repayment timeline for Christmas presents over several months, according to the charity National Debt Line [1]

Over the past year, there had been a 67% increase in people seeking help from Citizens Advice because they were struggling to pay back money owed from BNPL spending. [2]

Amid the cost of living crisis and with inflation stubbornly high, the Financial Conduct Authority says there has been a 25% increase over the last year in the number of new loans from pawnbrokers.[3]

Household unsecured debt is now on average £2,500 per family from personal loans, credit cards, overdraft facilities, pay-day lenders and licensed doorstep loans. As of May 2023, the Joseph Rowntree Foundation estimate an annualised cost of paying interest on this debt at around £3.9 billion, or around £680 per household on average. The average amount of debt held by those who have been using credit to pay bills is £4,450, compared to

£2,740 for those who haven’t. [4]

The Largest Fall in Real Income since the 1950s

Real household disposable income per person – a measure of real living standards – is expected to fall by a cumulative 5.7 per cent over the two financial years 2022-23 and 2023-24. While this is 1.4 percentage points less than forecast in November, it would still be the largest two-year fall since records began in 1956-57. [6}

Faced with these financial challenges it is no good and unfair to say huge sectors of the country should just turn their heating off or not buy Christmas or birthday presents.

Indeed - one of the way the wealthy get wealthy is in how they use debt to buy assets such as large houses and then pay off their mortgages with the profit they make from highly inflated property prices.

-Funding Reasonable Spending in a Reasonable Way-

So rather than just tell people they shouldn't get into debt - it is both more helpful and more accurate to talk about managing debt within reason and how best to fund reasonable spending in a reasonable way.

Don't Get Burnt

Debt is like fire, it is potentially dangerous and getting burnt is very easy. But without fire, we couldn't heat our homes, cook or run the modern world. And the same is true for debt - it is hard to do much without some debt. You just have to be very very careful.

0% Credit Cards

Obviously don't borrow unless you ned to but if used right, 0% spending credit cards are the cheapest way to borrow.

They charge 0% for a limited period and then the rate kicks in, so there will be a day of reckoning soon(ish) but if you need a temporary loan and are not going to forget to deal with it, then this is something to look at.

Barclaycard currently have a 21 month 0% interest rate card which then reverts to 24.9% rep APR (Jan 2024)
M&S Bank currently have a 20 month 0% interest rate card which then reverts to 24.9% rep APR (Jan 2024)

Check the details as they change often

Generally on credit cards it is important to clear the balance each month beyond the 0% period, otherwise you will pay a hefty amount in interest. Also don;'t use them to withdraw cash as that too will incur heft charges

Personal Loans

If you are going to need to borrow money for longer than the 0% interest free period then it is usually better to get a personal loan than run up bills on your credit card.

Whereas credit cards will usually charge in excess of 20% in interest a personal loan an be half that.

Santander currently charge 10.8% rep APR (Jan 2024)
Tesco Bank currently charge 7.3% rep APR (Jan 2024)
Sainsbury's Bank charge 7.3% rep APR (Jan 2024)

The rates available differ depending on the size of the loan.

Buy Now Pay (Pain) Later

Sometimes referred to as BNPL schemes, they are used by millions of people. It is a financial product that lets people split or delay payments to make them more manageable in the short-term. There is no denying that is can be very helpful for many people, especially for those who are unable to get credit cards or personal loans, but they can be risky.

It is very easy to use these method of payment online and you will often see a BNPL method of payment listed alongside credit cards, Apple Pay or PayPal. Because they have now made it so easy to use, people can end up using the loan without fully understanding what it is. Citizens Advice Bureau say that "...in fact, many people use it by accident because it’s the default payment method on a retailer’s website. [7]

They said that Of people who’ve used BNPL in the last year:

39% used it without realising
40% think BNPL isn’t “proper” borrowing
42% didn’t fully understand what they were signing up for

The big BNPL providers in the UK include Klarna, Clearpay and Zilch although there are many others.

Klarna, for instance, can look appealing because it’s interest free, at the beginning because the business model is to charge the fees to the retailer rather than the customer.

But miss a repayment, and you’ll be charged a late payment fee. Default altogether, and you’ll be handed over to a debt collection agency.

Charities and debt campaigners have been sounding the alarm about the risks of BNPL because of fears that consumers use it not just for occasional treats, but for day-to-day essentials.