You aren't alone in your debt

Personal debt in the UK has been steadily rising, reflecting broader economic challenges and individual financial pressures.

By the end of May 2024, UK residents collectively owed a staggering £1,852.5 billion in debt.

This marked an increase of £205 million compared to May 2023, adding an extra £275.94 of debt per adult. These figures highlight that personal debt in the UK is a growing concern for individual and households.

On a per-household basis, the average debt, including mortgages, stood at £65,239. So, for adults, the average debt was £34,537—an amount that is approximately 96% of the average annual income in the UK. This means that the typical adult in the UK owes nearly as much as they earn in a year, creating a cycle of debt that is almost impossible to break.

 

The Main Causes of Debt

  • Credit Cards and Overdrafts

Credit card debt is one of the most common forms of personal debt in the UK.

In 2023, it was reported that 43% of UK households were dealing with credit card debt.

Credit cards can be a convenient financial tool, allowing consumers to make purchases and manage cash flow. However, they also come with risks, particularly when not managed properly. High interest rates on unpaid balances can quickly escalate the amount owed, leading to a cycle of debt that is difficult to break.

Overdraft debt is another significant issue, with 22% of UK households facing this type of debt, according to Equifax. Overdrafts can provide short-term relief for those who need to cover expenses before their next pay check, but like credit cards, they can also lead to financial difficulties.

It's crucial for individuals to understand the risks associated with credit cards and overdrafts. Before taking on such debt, consumers should ensure they can afford the repayments and are aware of the potential consequences of missed payments or accruing high-interest debt.

 

  • Low Income

Low income is a significant driver of debt in the UK. Many people find themselves bordering on the poverty line due to salaries that are too low to cover the rising cost of living. The situation has been exacerbated by soaring energy bills, which have forced some households to go without heating or electricity in an effort to save money. When income is insufficient to meet basic needs, individuals may resort to borrowing to cover essential expenses, leading to a cycle of debt that can be difficult to break.

For those struggling with low income, managing a budget becomes critically important. Careful planning, prioritizing essential expenses, and seeking assistance where available can help manage limited finances. There are several ways to manage a budget on a low income and despite the difficulties by creating healthy habits you can take back your finances.

 

  • Lifestyle Transitions

Lifestyle transitions, such as changes in employment or relationships, can also lead to increased debt. For instance, moving from a two-income household to a single income, due to a separation or the loss of a job, can create financial friction. The sudden drop in household income may lead to difficulties in meeting existing financial commitments, forcing individuals to rely on credit to bridge the gap.

Similarly, changing jobs can bring new financial challenges. A job change might involve a change in salary, which could be lower than anticipated, or new expenses such as commuting costs or relocation. If not properly planned for, these transitions can result in unexpected debt.

 

  • The Challenges of New Businesses

Entrepreneurship can be a rewarding path, but it also comes with significant financial risks.

According to Experian, 50% of new businesses in the UK close within the first three years.

For many entrepreneurs, starting a business often involves taking on personal debt, whether through loans, credit cards, or dipping into personal savings. When a business fails, the debts incurred can remain, leaving the individual with substantial financial liabilities. When taking on a business loan it is important to weigh the risks.

The high failure rate of new businesses means that many entrepreneurs find themselves burdened with debt long after their ventures have ceased operations. This can have a lasting impact on their personal finances, potentially leading to further borrowing to manage the debt, which in turn can exacerbate their financial difficulties.

 

The Broader Impact of Personal Debt

The rising levels of personal debt in the UK have broader implications for both individuals and the economy. High levels of debt can lead to financial stress, affecting mental health and overall well-being. For households with significant debt, the burden of repayments can limit their ability to save, invest, or spend on necessities, which can have a ripple effect on the economy.

Moreover, as interest rates rise, the cost of servicing debt becomes more expensive, further squeezing household budgets. This can lead to a situation where individuals are only able to make minimum payments on their debt, prolonging the repayment period and increasing the total amount paid over time. You could qualify for debt relief which can significantly relieve the burden.

For those facing overwhelming debt, it is important to seek help early. Debt counselling services and financial advisors can provide guidance on managing debt, creating a budget, and exploring options such as debt consolidation or repayment plans. Taking proactive steps can help prevent debt from spiralling out of control and provide a path toward financial stability.