The UK debt tide is rising – how can you avoid drowning?

Campaigners have long warned of the problem and it is now official: Britain has a growing debt problem at levels not seen since the global financial crisis almost a decade ago.

Borrowing through credit cards, overdrafts and car loans - unsecured consumer credit - and other forms of financing has topped £200bn, confirming grim predictions from debt charities of the spiralling problems they see on the ground. Recent figures from the Bank of England have shown it grew by 10% in the year to June to £210bn, the highest figure since December 2008.

“There is a bunch of people hanging on by their fingernails and a little shock to their finances pushes them over the edge,” said Peter Tutton, of debt charity StepChange.

The charity estimates that 2.9 million people in severe financial difficulty and 9 million are “teetering on the edge”. The growing problem has led the Bank of England to warn lenders that they face action against reckless practices over what was described as a “spiral of complacency” by Alex Brasier, the bank director for financial stability.

Amid this sea of debt, what are the options for those close to drowning?

How do you spend it?

Be aware of how you spend your money and be reflective of where you are at any one time. Typically those who are most exposed to debt have limited pay progressions, more insecure work situations and are on low to middle incomes. When people find themselves in persistent debt, it can be very hard to move from that, said Tutton.

“If you find that you are doing things like using credit to pay for essentials or constantly in overdraft or constantly being hit by charges, then you are descending into financial difficulty,” he said.

Stick to the golden rule of borrowing: don’t go into debt for something that will last for less time than the amount borrowed takes to pay back. Sara Williams, the author of Debt Camel, a blog advising on money problems, said cheap personal loans – one of the causes of the current debt bubble – would work for improving a house as a new kitchen or similar work is an investment.

“If you are borrowing to go on holiday – well you are going to want to go on holiday next year as well, so you need to be able to repay that debt in a year. If you are just financing current consumption, you should be paying for that out of your current income,” she said.

Avoid the minimum

A regulatory clampdown on the multibillion-pound payday loan sector, including a cap on the total cost of credit, drastically reduced the number of people who had unmanageable debts from the lenders. But the credit problem did not go away. “It’s like a balloon, if you squeeze it in one place, it pops out somewhere else. You clamp down on payday loans and people take out more store cards,” said Dave Rankin, director of insolvency at Creditfix, a personal insolvency practice. “When you have inflation creeping up and wage increases not keeping up with that, it is kind of inevitable in a way.”

Store cards – essentially credit cards which can only be used in one store – have been identified as a growing problem because of their sky-high interest rates which can come in between 25% and 30%. Dubbed “the devil’s debt”, critics say they are often sold by untrained staff who do not explain the consequences of unpaid debt.

Credit card debt has been identified as one of the main problems behind the current bubble. Most important when trying to address the issue is to try and repay more than the minimum, said Williams.

“When you have a credit card, you can set it up to pay the whole amount, which lots of people can’t afford to do, or set it to pay the minimum. It sounds responsible to pay the minimum because you know you can’t miss a payment,” she said.

“But people just don’t believe how long it takes to repay a credit card because that minimum keeps dropping a small amount every month. I always encourage people to round up – if you are paying £86 now, most people will say they could pay £90. Then pay that same amount every month. Don’t fall into the minimum payment trap.”

Keep motoring for cheaper years

Another of the reasons blamed for the growing credit bubble is car loans, specifically where vehicles are bought using personal contract plans (PCP).

Use of the finance has increased four fold in the last 10 years. Under these cheap leasing deals, buyers pay a small deposit and then commit to making a monthly payment for a few years with the option to buy or hand back the car at the end. The spike in car financing has been partly attributed to people replacing their vehicles after lean years during which they could not.

This rise in car finance has resulted in people changing their vehicles more often than they should, and therefore missing out on years of cheaper driving, said Williams.

“It looks cheap and it is handed out without a great deal of checks on what you can afford. Sometimes you can walk down a street and you can look at the cars and think ‘how can they afford them’; and the answer is most of them are on finance,” she said.

“The car industry has found a way to keep people changing their cars after three or four years, getting another new car each time. All the depreciation happens at the start – you are missing all of the cheap years driving by getting these short-term PCP contracts. If you keep each car for six years instead of three, you are going to pay a dramatic amount less for cars over the whole of your life.”

Look for help

Half of the people who contact StepChange say they waited a year before getting any help for their problems – a time when things usually got worse. When in trouble, seek help sooner rather than later, said Tutton.

“There is a message there for people in that the earlier you get help, the less pain it will be. If you are struggling and you are going slowly downhill, all that will happen will be that you will get more stressed, your debts will build and when you fall over it will be that much more painful,” he said.

StepChange suggests making a budget to give a clear picture of what money is coming in and going out so that you can then understand what repayments are possible to work down debts.

“It’s crucial that you make sure before putting money to repaying debts that you have allocated money in your budget for your essential living costs (food, clothing, travel and so on) and what are called priority bills – these are things like mortgage/rent, gas, electricity bills and council tax,” said a guide from the charity.

There are a number of organisations around the country which can help – amongst them National Debtline, Citizens Advice, the Debt Advice Foundation and PayPlan. But most importantly – get advice before making any decisions.

Broke beside the seaside

Coastal towns accounted for seven out of the 10 worst areas for personal bankruptcies last year, according to a new analysis.

The highest number of bankruptcies was recorded in Torquay (pictured), where there were 43 insolvencies per 10,000 population. The national average stands at 19.7.

The other areas are Scarborough, Hull, Plymouth, the Isle of Wight, Great Yarmouth and Blackpool. The details show how coastal areas can often fall behind other parts of the country as their economies are not as diverse, often relying on tourism, according to accountancy firm Moore Stephens, which carried out the research.

“As seaside tourism declines, there is less chance for these areas to reinvent their image as exciting, vibrant places for business to thrive. High levels of debt show the underlying fragility of those economies and the low levels of accumulated wealth in these towns,” said Jeremy Willmount from the firm.

“As the fishing industry and other traditional coastal trade have declined, people in seaside towns are continuing to fall into debt as the local economy in these areas fail to keep up with the rest of the UK.”

“This is despite the expected rise in the number of ‘staycations’ taken by Brits after the weakening of the pound after Brexit.”