Personal Debt

Written by Julia Goldworthy MP and published in House Magazine on Mon 23rd Oct 2006

It is striking to note the groups of people that are most affected by personal debt. It is not just families on low incomes that battle with debt, but pensioners and young people alike are also struggling to clear their overdrafts.

Personal debt can often be a bigger problem for the elderly, who are mostly on fixed incomes with little chance of earning a better wage. Elderly people tend to be the targets of unscrupulous lending by credit card companies. Seventy percent of pensioners have a credit card and according to a recent BBC investigation, some credit card companies are setting pensioners' credit limits at three times above the average. Unfortunately, the problem can also be exacerbated as many pensioners are targeted by scams, duping people into sending money to win prizes that do not exist.

Young people, and not just students, also tend to struggle to service their debts. Fifteen percent of the Consumer Credit Counselling Service's client base consists of people aged under 25 - an increase of ten percent since 2003. Young borrowers are often more worse off than older people with debts because they do not own any assets and have little in the way of spare income to make repayments. The problem is worsened when one considers that a typical student on a three year course will now have an average of £9,000 in tuition fees to pay back.

Equally worrying is the large number of households without adequate payment protection insurance on their mortgages. At present, only twenty percent of mortgages are protected, many policies are very expensive and have exclusions in the small print which limit their value. The Financial Services Authority must investigate the malfunctioning of the market for mortgage PPI, currently worth £5bn to the banking industry. A proposal has also been made to require six months protection from creditors in the event of personal tragedy; it is up to the Government to implement this.

There is also much more that needs to be done to confront growing personal debt. The Government has promised a network of independent, debt advice centres, but these have yet to be rolled out. Although the Citizens' Advice Bureau does an excellent job of advising people already experiencing debt difficulty, a genuinely independent network would not only help restore confidence in the financial services industry, but would also prevent people from getting into unnecessary debt in the first place. It is therefore important that the Government works with the financial services industry to create a national network providing such a service.

A key area that needs to be addressed is the current lack of financial education in our schools. Research by the Institute of Financial Services (IFS) has suggested that 50% of people don't know what 50% means. Although the National Curriculum will be improved in 2008, it is vital that there are also lessons in budgeting and money management. There is some good work already being done by the IFS, who have developed courses in financial capability, but this needs to be expanded across the whole of the education system.

Alongside the Government, the financial services industry must also accept its share of responsibility for rising personal debt. Over the summer, credit card companies agreed to significantly reduce their default charges. It is now time for high-street banks to follow suit and reduce their unfair and often hidden charges which can plunge people into immediate debt, often for going only a couple of pounds over their overdraft limits.

OECD figures show that eighteen percent of take-home pay now goes on debt service, with two million workers starting the month in their overdraft, even after they have been paid. Repossessions are rising at a far greater great than unemployment, suggesting that personal debt is exacerbating the problem. In the event of a significant economic downturn, unless action is taken, growing personal debt could have a major detrimental impact, not just upon individual households but also on the wider economy.