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The Household Debt Crisis

Joe Cox

The soaring cost of living is forcing millions to turn to credit card borrowing just to survive. We need a write off of unjust debt to give people a chance to rebuild their lives.

UK households have taken out £13 billion of borrowing just to survive. (Adam Gault / Getty Images)

Towards the end of last year, a trade unionist told me that a growing number of their members were increasingly reliant on credit card borrowing. At the time, the financial press were pointing to ‘increasing consumer confidence’ and hopefulness about the ‘reopening of the economy’, but given what I had heard, I was sceptical that increasing confidence in the economy could be the cause of this extra lending.

Analysis of household surveys conducted by Debt Justice late last year confirmed that behind the boosterish headlines, things were getting worse for millions of UK households. An extra 1.3 million were pushed heavily into debt in 2021, even before Universal Credit was cut by £20, the Omicron wave and the surge in the cost of living. 

With inflation currently running at least three times the rate of benefits and double that of wages, borrowing is largely driven by need. Polling and analysis from the debt advice charity Stepchange confirmed that people are getting into debt to pay bills and make it through to payday, with households in the UK having taken out an estimated £13 billion of borrowing just to survive. 

What forms of borrowing people turn to depends on how well different products are regulated and marketed as well as their availability, repayment terms, fees, and charges. It now looks increasingly like people are turning to credit cards, with the Bank of England reporting that in the last 12 months, credit card borrowing has increased by a record 11.6 percent, the highest since November 2005. 

The household debt crisis is primarily a crisis of incomes: low incomes, insecure incomes, incomes that you cannot build a stable life around. Given this, it is wholly predictable that during the cost of living crisis people are increasingly turning to credit to make ends meet. 

The repercussions of heavy debt will last well beyond the media headlines. Linda aged 66 recently told me that ‘I’m hopeful that I will clear my debt by this time next year, 40 years after the initial use of a credit card’.

Linda’s husband was controlling, and his actions pushed them into the debt she remained liable for after her divorce. ‘I tried over many years to get clear but, inevitably, it was like Sisyphus pushing a rock up a hill’ she said. 

Having left her job as a teacher and becoming self-employed, she concluded that the only way out was bankruptcy. After the bankruptcy period was over, credit card companies encouraged her to take on lending again to ‘improve her credit score’. Due to her credit history these new cards came with even higher rates of interest. 

Linda tried to use them only in emergency situations but ‘they have a habit of building up’ she said, since ‘it takes very little in the way of a financial problem or temporary reduction in income to cause the further use of the credit card…and so the cycle continues.’

Increasing numbers of people in the UK are now trapped in this cycle of heavy and persistent credit card borrowing, with as many as 2.8 million people paying more in interest, fees and charges than in paying off the debt. Figures from industry body UK Finance also show nearly 54 percent of credit card balances are now incurring interest

You cannot disconnect credit card borrowing from other forms of credit—and the warning signs on the dashboard are all flashing red. Last week, Citizens Advice published research showing that two in five ‘Buy Now Pay Later’ borrowers are paying back these purchases with extra borrowing, most commonly credit cards. These sorts of juggling acts can only last so long before they come crashing down. 

With heavier bills dropping on the doormat and bank accounts increasingly empty before pay day, no one should be stigmatised for reaching for credit to keep the lights on, or feed themselves, or even just find some joy in their lives. Instead, we should be building an economy where no one is forced into making these difficult choices in the first place.

The first step must be to alleviate the pressures pushing household finances to the brink, which requires action to increase wages and tackle the soaring cost of goods. But support is also needed to help those who are already struggling with debt.

That is why we at Debt Justice are campaigning for a fair debt write down in the UK. We want to see a debt restructuring fund created by the Treasury and used to buy out personal debts which have often already been devalued and sold to debt collection companies at knock down rates. Every single person who gets pushed into unpayable debt deserves a chance to reset their finances and re-build their lives.