Back in 2010, reeling from a global financial crisis, Britain entered into a period of austerity. Talk from the government was of tightening belts, sensible spending and paying down debt. But while public expenditure has undoubtedly been tightened since then, levels of consumer credit have been creeping inexorably upwards.
Findings from a new report by ACCA, released today, show that over-indebtedness is reaching “massive” levels among the most vulnerable groups in UK society. Among the most at risk are self-employed workers, employees earning low wages and those participating in higher education funded by personal borrowing.
Worrying reliance on credit cards
The increasing use of credit cards among these most vulnerable groups is of great concern. When credit cards are used in a disciplined way, clearly they can be an excellent tool for managing variable levels of income. Unfortunately, the recent FCA Credit Card Study highlights a worrying state of affairs among borrowers. The study indicates that 40 per cent of cardholders, who account for 60 per cent of the total balance, pay interest on their debt.
When the borrowing behaviour of this group is broken down, a disturbing picture emerges. A full 2m cardholders were in arrears or default with 1.5m having missed three or more months-worth of repayments. A further 2m cardholders have a persistently high level of credit card debt that they may struggle to pay. And perhaps most worrying of all, 1.6m make systematic minimum repayments and a massive 5.1m cardholders will take more than a decade to pay off their balance, assuming they do not borrow any more money.
Catching the problem when young
The increasing use of credit cards and the debt levels among these three vulnerable groups is of great concern. What’s more, savings are on a downward trajectory and the number of people choosing self-employment and further education – two of the most vulnerable groups – are rising. This is clearly an issue which requires immediate attention.
We know that, if people gain a good understanding of financial management at a young age, they are more likely to successfully stay on top of their finances throughout their lives. That is why it is particularly important that we ensure young people learn – and put into practice – good financial habits while still in education.
Making debt and savings work for students
Students in higher education have two major challenges when managing their finances. The first is the funding of courses and their living expenses during the period of study. The second is managing the repayment of tuition fees and maintenance grants after their studies have finished.
One way of addressing the first challenge is to introduce monthly maintenance payments instead of paying one-third of the annual amount at the beginning of each term. This already happens in Scotland and mirrors how payment is received in the working world much more closely, so helping students learn the valuable skill of managing their finances over time.
Another initiative, which would go a long way to alleviating potential financial management issues for students both during and after higher education, is the introduction of a savings account with incentives. Under-18s could be offered a matched savings account based on an Isa incentive, whereby if the account holder saves £1,000, say, the government would match this amount once the young person enters further or higher education.
Around 40 per cent of full-time students leave education with an overdraft, with an average balance of £894 in debt. A savings buffer of £1,000 could therefore save the majority of students from having an overdraft at all. We must do all we can to ensure that young people embark on the next stage of their lives set up to save for the things they will need to build a life. Helping them minimise their debt at this early stage is a crucial part of that.
Financial risks of self-employment
Once the next generation leaves education and enters the world of work, we know that an increasing number of them are seeking a new type of career. Things like greater flexibility, more autonomy, entrepreneurship and being able to build a portfolio career are becoming ever more important. These are all exciting aspirations with clear benefits to Britain’s economic future, but they also come with risk.
Savings, therefore, become all the more important, as does a sound understanding of financial management. This knowledge – when practical enough to be applied to their lives – is vital to becoming successful, worry-free adults.
This month is the first anniversary of ACCA’s revolutionary initiative, ACCA-X, which provides free online courses in financial management and accounting that enable anyone to improve their expertise. ACCA-X has already led to greater financial proficiency and confidence for almost 100,000 individuals to date. Initiatives like ACCA-X can work alongside a commitment from government to help the next generation to get off on the right foot.
By improving education and awareness together, we can reduce the reliance on credit among the most vulnerable groups and create a more manageable level of personal debt in this country, along with a more ethical, positive financial marketplace.