Over 8 million people in the UK are unable to pay off debts or meet their monthly household expenses, according to a report by the National Audit Office. Mortgages and credit card spending are the two most common types of debt, with cardholders spending 8.1% more in 2018 than in 2017. Essentially, homes are spending more than they are earning, spurred on in part by low bank rates. In order to lower their total debt, it is key for households to differentiate between necessary and unnecessary borrowing, so as to make key changes that will lower their total amount of debt.

Not All Debt Is A Result Of Poor Management

Debt charity, StepChange, has found that the number of people asking for debt advice has increased in recent years. There are reasons for this, including hefty student loans that can shake a graduate’s financial stability for many years. Currently, the average graduate from a three-year degree carries a £50,000 debt with high-interest rates. There are two more important reasons for the fact that the average household debt (not including mortgages) stands at a record £15,400: wage stagnation and cuts to public funding. TUC General Secretary, Frances O’Grady, has stated that “Years of austerity and wage stagnation has pushed millions of families deep into the red. The government is skating on thin ice by relying on household debt to drive growth. A strong economy needs people spending wages, not credit cards and loans.”

Reducing Credit Card Debt

Families may need to rely on credit to get by, but there are ways to reduce their total debt. Budgeting is key; apps like Money Dashboard, Bean, and Emma are a good place to start since they give you a good overview of your finances. These apps allow users to categorise their spending, with a view to identifying which areas can be cut down. Credit card debt can also be reduced by comparing interest rates and coming up with a repayment plan that targets high-interest spending. Users should also be encouraged to keep a clear eye on their spending, and to identify any expenses made via fraudulent means. While most banks have sophisticated programmes centred on identifying fraudulent purchasing patterns, some can escape their keen eye, and often, amounts may not necessarily be large enough to call attention to the card owner.  

Debt Management Plans

For some people, a debt management plan (DMP) may be helpful in getting them back on the right track. A DMP permits you to make one monthly payment to the provider, who is in charge of liaising with creditors to try and obtain favourable terms. This type of plan is useful for those with non-priority debts like personal loans and credit. Additional options like DROs (Debt Relief Orders – useful for those earning very low incomes), Individual Voluntary Arrangements (which usually set a specific number of years in which debt must be paid off) and Bankruptcy are all options that should be discussed with a financial adviser. Sometimes, for instance, clients may be advised to file for bankruptcy rather than opting for an IVA. This is the case when, for instance, the debt cannot realistically be paid back in a small number of years.

The average person in the UK lives with debt, an issue that is only worsened by the student loan crisis. Far from being merely a budgeting issue, debt is linked to wage stagnation and austerity measures. Those struggling to meet monthly expenses should evidently first make an attempt to lower extraneous spending. However, financial planning may be necessary if households are struggling to meet their monthly expenses.