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We Need to Talk About Debt

With 24% of the UK losing sleep over debt and 48% worried about how Brexit will impact their personal finances, is it time to talk about debt?

The UK’s debt landscape has dramatically changed over the last decade. While household debt isn’t exactly a new concept, debt charities have reported a significant shift in the levels of debt problems people now experience across the nation.

In the first half of 2018 alone, 326,897 new clients contacted StepChange, a leading UK charity providing support for indebted households, for help with problem debt.

The longest pay squeeze for two centuries, public spending cuts and the lingering effects of the 2007- 2008 recession are considered the cause of UK households accumulating debt to the tune of £428 billion, according to the Trades Union Congress (TUC).

Other official bodies have also released similarly astonishing figures, such as the Office for National Statistics (ONS), who last year told us that British households spent around £900 more on average than they received in income in 2017, amounting to almost £25 billion in total.

Whichever way you look at it, there are some very big – and rather concerning – figures circulating about debt these days that we might need to talk about.

Conversation-worthy figures

24% lose sleep over how much debt they have

48% are worried about the impact of Brexit on their personal finances

41% are not comfortable talking about debt with friends and family

What is perhaps most shocking about these figures is how little Brits discuss debt as a widespread issue. Whether it’s with family and friends, or as a public topic of concern, debt seems to be one problem that doesn’t get talked about nearly half as much as it should, given its impact on our daily lives.

As part of an initiative to bring greater awareness to the problem of the UK’s debt, and how individuals can manage its psychological burdens, Know Your Money has conducted an extensive survey into the topic.

In addition to confirming some commonly held notions, we discovered some important facts that go to the heart of the UK debt problem.

If you’d like to get a better grasp of your personal debt levels, we’ve also provided a special debt-to-income ratio calculator below that may be a useful tool in helping you understand and manage your debt.

Find out your debt-to-income ratio using our calculator

What's the problem?

The distinction between ‘good’ debt and ‘bad’ debt is an important one. Having debt in itself isn’t the problem, as many of life’s necessities will require loans of some kind to substitute for the money you don’t currently have.

This is the case with cars, houses or higher or further education. If you’re able to eventually pay off this debt with your future earnings, over the course of several months or years, this can be considered a good debt, as it will leave you better off in the long term.

Bad debts, on the other hand, are those that are not affordable and have no prospect of paying for themselves or benefiting your life in the future. This includes borrowing money to pay bills or credit card repayments. While accumulating this kind of debt may be necessary at times, it’s worth trying to limit just how much you rely on this method of payment.

The Money Advice Service (MAS) estimates that 8.3 million people in the UK are over-indebted. Also known as ‘problem debt’, over-indebtedness has plagued many UK households who find that their finances are increasingly depleted by unsustainable debts offering little long-term benefit to their lives.

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of people are happy to buy items on their credit card without considering how they will pay it off.

While many of us may have some form of debt, problem debt occurs when you are unable to keep up with the payments. This may involve missed payments, letters from creditors and additional loans to pay off existing debt.

Some blame the UK’s credit card-friendly consumer culture for unnecessary debt accrued by households. With 33 per cent of people in our survey happy to buy items on their credit card without considering how they will pay it off, there may be some truth in this.

However, it is also true that the financial crisis caused lasting economic damage that is still felt by many households in the UK today.

It seems more and more individuals are being pushed into unmanageable debt by the gradual squeeze on household budgets and austerity measures imposed by the government in the past decade. Inflation has also gradually outstripped wage growth and increasing payments on energy bills, council tax and other household debts have nudged many individuals into the red.

It’s true that debt problems are also typically driven by life-changing events affecting income, such as accidents, loss of employment or personal tragedies and illnesses. So what we’re witnessing isn’t a complete change as such, but an evolution of an already complex debt landscape that causes a great deal of concern as the UK enters a period of uncertain economic stability following Brexit.

Most common types of debt for men & women

A debt to your wellbeing

One of the biggest problems when it comes to problem debt is the mental burden involved for those who have it. Our research indicated that almost a quarter (24 per cent) of the UK loses sleep over their debt – a concerning figure when you think about the strong links between sleeping and mental health.

Causing worry and stress for many, the ongoing concern about meeting increasing financial obligations with finite earnings can lead to depression, anxiety and other mental health problems.

Certain players in the debt charity sector are working hard to illustrate the link between debt and wellbeing, but this is a problem that many are still in the dark about.

In a report titled ‘A Silent Killer’, highlighting the link between financial difficulty and suicide, the Money and Mental Health Policy Institute found that over 420,000 people in problem debt consider taking their own life in England each year. And more than 100,000 people in debt do actually attempt suicide.

There isn’t one simple factor that leads to this. Pressures from creditors, decreased self-esteem and lack of sleep and appetite can all add to the distress caused by debt. The problem also gets more complicated with many unable to share their burden with others. Almost 70 per cent of people in our survey said they avoid talking about debt whenever possible. But why is this?

Whether it’s misplaced British sensibility or the stigma that still exists around this issue, a lack of dialogue surrounding debt and the reluctance of people to share their troubles with their loved ones has done little to remedy the concerning debt levels of the UK’s citizens.

We can only hope that further exposure of the issue brings change to social attitudes and that charities and government bodies can work together to provide solutions for the thousands that still need help.

On an individual level, simply talking about these issues more openly and without judgement is one way to help ease the burden, whether this means reaching out to friends, family or colleagues you know who are suffering.

StepChange Debt Charity

Debt can lead to serious relationship problems, breakdowns and reduced self-confidence. Large numbers of people do not discuss their problems or wait long periods before seeking help, which can further worsen their situation.

Implementing some added measures to understand and reduce debt seems like a smart move for a nation facing an uncertain economic future.

Coping with debt

Accepting that you have problem debt and actually seeking help can be incredibly difficult. Many of us are probably familiar with the feelings of reluctance or embarrassment when it comes to talking about the size of our credit card bills or our late mortgage payments, for instance.

Also, these conversations can often involve confronting issues that go beyond just money alone, as the causes of debt can be complex and rooted in your relationships with those around you. And this naturally makes it even harder to talk about debt.

When speaking with StepChange on the topic, however, they told us that talking about debt is one of the most important ways to tackle the problem. Where possible, the charity recommends that individuals suffering from problem debt should be open and honest with their loved ones about their financial situation. This is so that they can share their burden and receive practical advice and encouragement for overcoming their debt challenges.

While 41 per cent are not comfortable talking about debt with their friends and family, communication is one of the biggest factors in receiving help and improving circumstances.

For those of you who may not be suffering from a debt crisis but are concerned about the state of your debts, a sober look at finances with a determination to improve your situation is a good first step. Following this, there are some great tools online that can help you gain a clearer picture of your debt situation, such as StepChange’s Debt Remedy tool.

Also, commonly used to assess an applicant’s viability for mortgages, a quick debt-to-income (DTI) ratio calculation can be a good measure of how your earnings balance out against your various outgoings.

Interestingly though, 39 per cent do not know what the term ‘debt-to-income ratio’ means and 44 per cent do not know what their own debt-to-income ratio is.

Some may have a larger DTI ratio but will have practical plans in place to pay off debt eventually with future earnings. Others may have low DTI ratios but will struggle to pay this off.

Therefore, the outcome of this calculation is completely relative to your circumstances. But for those looking for a helpful tool to get a better sense of their debt situation, this can be incredibly useful.

With 48 per cent of people worried about the impact of Brexit on their personal finances, implementing some added measures to understand and reduce your debt seems like a smart move for a nation facing an uncertain economic future. Whether it’s sorting out your loans and credit cards for 2019, consolidating debts or simply making a plan for how each debt will be paid off; there are some useful ways to tackle your debt if you’re willing to try.

The important thing is to understand that debt is a national problem and not isolated to any one person’s life. The Money Advice Service, StepChange, National Debtline, Citizens Advice and many other organisations offer a wealth of knowledge online designed to help individuals who are indebted. You can also contact these services directly for personal and confidential advice.

What is Debt-to-Income Ratio?

DTI ratio is how much debt you have in relation to your earnings. The overall percentage, calculated by dividing total recurring monthly debt by gross monthly income, doesn’t inherently have a negative or positive connotation, but can help you understand your financial situation better within your individual circumstance.

39% do not know what the term ‘debt-to-income ratio’ means

41% are not comfortable talking about debt with friends and family

48% are worried about the impact of Brexit on their personal finances

StepChange Debt Charity

Credit can help people meet their essential costs in the short term, but people who used it are subsequently much more likely to fall into severe financial difficulty than people who rely on benefits or other methods of coping with shock and changes to their income.

Household resilience in 2019

Everyone in the UK should be aware of household resilience this year. While we can’t say for sure what impact Brexit will have on the nation, there are a number of different forces that could worsen the overall economic security of UK households throughout 2019.

This includes fluctuating trends in the job market, changing prices of basic commodities and a change in how European businesses deal with UK businesses, potentially affecting product demand and trade agreements.

It won’t be news to you that one of the biggest concerns for people over Brexit is how it will affect their personal finances. Almost half of the UK is worried about this issue according to our survey. What’s interesting, however, is that 48 per cent do not have clear financial plans for 2019 about how they will save, spend and invest money.

So when do people stop worrying and start acting? Perhaps many would if they could. After all, you need some form of positive capital to start saving and planning for your future. But as our survey suggests, much of the UK isn’t in a position to do this, with 67 per cent of people without any savings to pay off any short-term debt and 27 per cent who haven’t put any money into savings in the past 12 months.

Lloyds Private Bank also confirmed this situation in their latest Quarterly Savings Review showing that 27 per cent of Brits have not put any money into savings in the past 12 months and 38 per cent are not satisfied with their current savings pot.

Even more concerning is the 29 per cent of people in our survey who do not feel in control of their debt or have a clear plan for how and when they will repay it.

There are a number of ways to improve financial resilience and reduce your vulnerability to future crises that range from creating small pockets of savings to buffer short-term changes to your finances and government benefits, to making sure you take out insurance.

It may seem like credit cards are the only way to plug the gap, but as debt experts like StepChange have advised, people who do this are more likely to fall into severe financial difficulty, so it’s well worth looking for ways to provide your family with some added financial security this year.

38% or 19.7 million people do not have any form of debt

In terms of individual cases of problem debt, there are many options out there that can help improve your situation. Organisations such as StepChange and the government’s Money Advice Service have released comprehensive guides, strategies and advice for those who need it.

As mentioned though, reaching out to someone close and sharing your problem is also an important part of the process when it comes to combating debt and its causes.

Many believe, however, that a complete shift in attitude is needed to address debt as a national problem. After all, debt has a tangible impact on the wider economy and dangers of more households falling into unmanageable debt this year won’t be good for anyone.

As it’s clear that most people are concerned about their finances and many are actually losing sleep over their debt, this should no longer be a taboo or a ‘hush-hush’ topic. Debt is nothing to be ashamed of and the causes are often out of an individual’s control.

On a larger scale, we can hope for a shift in policy and government attitudes towards debt, especially when it comes to arrears on utility bills or loans. Implementation of the government’s Breathing Space Scheme, for instance, is a step in the right direction.

Offering those in problem debt the right to legal protection from creditors while they enter into appropriate debt solutions could well be a lifeline for many.

Finally, understanding the complexity of the problem and its widespread effect on the UK population will also help the issues outlined in this piece. According to StepChange, people with different incomes and costs need a range of safety nets to help them adjust and bounce back from financial difficulty. It is only with increased openness and sharing on this topic that we can give the right tools to the people who need them most.

So, whether you’re looking at a healthy debt-to-income ratio for 2019, or if your outgoings have become unmanageable, approach debt differently this year. As a nation, it’s something we all need to be thinking, and talking, about.

StepChange Debt Charity

Problem debt undermines productivity, and blunts the incentives in the welfare benefits system to take work or take more work, and leaves people less well insulated against future shocks. Once in debt people end up further from the labour market with reduced chances of working their way out of financial difficulty.

About the survey

Know Your Money commissioned the research which was subsequently conducted by Opinium, a member of the Market Research Society (MRS) Company Partner Service, Opinium upholds the code of conduct and quality commitment of MRS across all phases of research, including:

  • Research design and data collection
  • Communicating with respondents
  • Conducting fieldwork
  • Analysis and reporting
  • Data storage

The research was conducted online and uses a data sample of 2,008 UK adults, which is fully nationally representative. This means the sample is weighted to ONS criteria so that the gender, age, social grade, region and city of the respondents and corresponds to the UK population as a whole.

View the original research details here.

John Ellmore, Know Your Money

It’s vital that consumers understand their DTI ratio and manage their finances accordingly. Not only will this help them sleep easier at night, but it will also help ensure they avoid serious financial issues further down the line.

Find out more about your debt-to-income ratio