Richest more likely to fall ‘into the red’

New research by Opinium for Hargreaves Lansdown suggests that the richer you are, the more likely you are to fall debt ( ‘into the red’)

The research also found that higher rate and additional rate taxpayers are more likely to be in the red for at least half the month (14% compared to 9% among basic rate taxpayers).

Londoners are most likely to be in debt – 11% spend at least half the month in the red versus 2% of people who live in the North-East.

Whilst one in ten young people are in the red for at least half of every month (compared to 4% of those aged 55 and over).

Men and women tend to borrow differently, but overall there’s no debt gender gap: the same proportion of men and women (7%) go into the red for half of each month or more.

Sarah Coles, Personal Finance Analyst, Hargreaves Lansdown said  “Expenses tend to expand to absorb all the cash available – and a bit more into the bargain. So it’s not just younger people and those living in expensive cities who struggle to stay out of the red: higher rate and additional rate taxpayers are more likely to end up in debt too. Unfortunately, small slip-ups can cost us big. Going into the red each month – such as relying on an overdraft or credit card – could set us back over £1,000 in interest over a decade.”

“Some of the trends show just how difficult it is to make ends meet when you’re on a relatively low income. Young people are most likely to dip into the red for at least two weeks each month, with 10% of 18-34 year olds admitting to this, up from 7% last year. The rise reflects the fact that young people have been hit particularly hard when it came to job losses and furlough during the past year.”

“Other trends are all about outgoings. London is a notoriously expensive place to live, so it’s hardly surprising that 11% of those who live in the capital need a helping hand from their overdraft or credit card to get through each month, compared to just 2% in the north-east. Likewise parents with children under 18 living at home face the higher running costs of a bigger home, along with constant financial demands from their offspring, so it’s no surprise they’re twice as likely to be in the red for at least two weeks a month (10% of parents, versus 5% of households with no under 18s). For those families with four children at home, this figure rockets to 28%.”

“But some trends come from a false sense of security. While being single is often more expensive than being coupled up (as you can share certain expenses), it is actually cohabitees that are most likely to be in the red (11% compared to 7% of singletons). This may be because they feel more secure with two incomes to fall back on, so they’re less vigilant about avoiding debts.”

“Higher rate and additional rate taxpayers are more likely to be in the red than basic rate taxpayers. Going into debt isn’t necessarily a reflection of how wealthy you are. Instead, it’s about the balance between what you have coming in and what you have going out. If you live in a bigger, more expensive home, have children in private school, and buy your essentials from Waitrose, the things you consider to be absolute essentials will cost several times that of someone in a smaller property who shops at Aldi.”

“It appears that the colour red suits men and women equally. While FCA statistics show that men are more likely to hold credit cards or loans and women are more likely to use retail credit or high cost loans, overall these tend to balance one another out. The survey showed that 7% of both men and women go into the red for at least half of every month.”

“It’s not the end of the world if occasionally we fail to balance the budget and need to fall back on a credit card. It’s when it becomes a nasty habit, or we find ourselves perpetually ‘stuck in the red’, that it becomes more dangerous. Like most things in life, getting your finances on track – and back in the black – requires some work. It isn’t just down to luck or the roll of a dice. Moving the dial from red to black may seem impossible, but it can be done, and a budget helps enormously.”

The research found that someone going into their overdraft by £500 all month every month for 10 years would have to stump up £1,663 in interest, assuming a 39.9% interest rate. Someone who went into the red by £500 for three weeks each month (rather than the whole month) would pay £1,159 interest over a decade. For a £500 overdraft for two weeks of the month, the cost is £773, while for one week it’s £386.

While these are not insignificant sums, a 39.9% overdraft is a lot cheaper than using a payday loan. Borrowing £500 for a month every month for a decade using payday loans would trigger a bill of £14,400 in interest. For 21 days a month, the cost is £10,080, for 14 days it’s £6,720 and for seven days it’s £3,360. This assumes an interest rate of 0.8% a day.

Borrowing on a credit card works slightly differently. If you were to borrow £500 for a week or a month and pay it off in full, there wouldn’t be a charge. But if someone were to borrow £500 and only pay the minimum amount each month (about £16, assuming an interest rate of 29.9%), they would incur £1,329 in interest, and it would take them more than 14 years to clear the debt.