The Bank of England decision to hike interest rates for the first time in ten years is positive news for savers as they will start to see better returns on their cash savings, but for the growing number of people in the UK struggling to keep a lid on their financial debt, this rate hike will cause further difficulties. UK consumer debt continues to rise to record levels and even small increases in interest rates can make existing debts unaffordable, particularly in an environment of low wage growth and rising inflation.
Recent analysis by PWC identified that the level of unsecured consumer debt in the UK has reached close to £300 billion, or £11,000 per household, growing at a faster rate than at any time in the past 15 years*. Car finance, credit cards, overdrafts and student debt account for 75% of the growth. According to the Office for Budget Responsibility’s March 2017 forecast, total household debt is predicted to reach £2.296 trillion in Q1 2021.**
An effective consumer credit market is vital to the economy, and can enable people to have better lives for example allowing them to invest in their education, families or assets. But for an increasing number of people their debts are becoming unmanageable. This is a serious issue and there will be damaging implications for growth in the UK economy if steps aren’t taken by companies to address the issue.
Earlier this year we published the TDX Group Consumer Debt Report 2017 in conjunction with YouGov. The study as divided into two sections. Part one charts the state of the nation today, with data on the scale and breadth of consumer debt, the extent to which people are concerned about their household finances, and the number of borrowers already facing financial difficulties. Part two sets out borrowers’ views on how they believe organisations should behave towards struggling customers – and how they would respond to good or bad experiences. This also poses a challenge to creditors, too few of whom are making effective use of data to identify potential problem borrowers ahead of time, or to differentiate between different groups of borrowers.
The data showed that over a quarter (28%) of Brits feared they may not be able to keep up with repayments on their personal debt, and almost half in debt (49%) owe money to more than one organisation. In addition, one in four (25%) are concerned they could lose their job, while almost one in five (18%) are worried their pay levels might fall.
Although less than one in 10 (8%) would seek help from a company/lender they owe money to if they needed financial help, the report revealed that consumers are looking for businesses to be supportive and offer practical solutions to any financial difficulties they encounter, such as a reduction in repayment costs (cited by 41% of people surveyed), a reduction or break in interest being added to their debt (37%) or a part write-off of their debt (29%).
The cost of getting your approach wrong could be substantial to businesses, with 46% of consumers saying they wouldn’t deal with a company again if it provided poor service at a time they were suffering financial difficulties, or if it failed to provide solutions that might help improve their situation. A third (33%) would share such bad experiences by advising friends and family to steer clear of a company that behaved in such a way.
For lenders, the wake-up call is clear: now is the time to prepare for an increase in bad debt – and, above all, to think more strategically about how to respond. That means identifying the likely scale of the problem and developing a differentiated approach recognising that struggling borrowers are not all the same. Both require better use of data.
In the coming months, major issues like tensions around Brexit negotiations and political uncertainty, rather than micro industry challenges will have the most impact on managing bad debt, and companies must respond now to limit their exposure. Those that don’t wish to lose market share must respond accordingly, fulfilling their responsibility to treat customers fairly, reduce the likelihood of confrontation with the regulatory authorities, limit reputational risk and enhance their competitive advantage.
Richard Haymes, Head of Financial Difficulties at TDX Group
**Office for National Statistics data shows average weekly earnings (before tax) in the UK now stand at around £507. Allowing for tax and national insurance, average monthly earnings are therefore likely to be below £2,000. https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/earningsandworkinghours