Not much business news cut through to people in September. The takeover of Costa Coffee by Coca-Cola was noticed by a third of the population (32%), nearly a third remembered British Airways’ data breach which put 380,000 customers at risk and one in five (19%) recalled Tesco’s launch of its discount grocery store, Jack’s.
However, perhaps the biggest and most concerning story went almost completely unnoticed.
We need to talk about debt
As the banking crisis was about to break, Warren Buffet, warned that ‘you only find out who is swimming naked when the tide goes out’.
The Bank of England is certainly worried that too many of us are swimming naked in a sea of debt.
A year ago, the Bank cautioned lenders that the UK’s ballooning consumer debt of £200bn was unsustainable. It ordered banks to hold an extra £10bn of capital to protect against future losses, because they were underestimating their exposure to bad debts, particularly in their credit card and car finance businesses. Alex Brazier, the Bank’s executive director of financial stability described a ‘spiral of complacency’ about a consumer credit market that was growing at 10% a year when household income was growing at only 1.5%.
This summer, the ONS published a report titled ‘Making ends meet: are households living beyond their means?’ It showed that consumer debt in the UK was ‘worse than at any time on record’. British households are spending £900 more on average than they receive, pushing their finances into deficit for the first time since the credit boom of the 1980’s. Credit card debt alone, according to The Money Charity, hit £72bn in June, the equivalent of £2,650 per household. From being among the most solvent in the 1990s, UK consumers are now among the most indebted compared to other major western countries.
This week, the Bank of England’s suggested that UK households are continuing to ramp up credit card debt with liabilities growing by 9% per year.
Expect further warnings from the Bank on the systemic risk posed to the financial sector by a consumer credit bubble that seems to be spinning out of control.
What happens next?
The market is already starting to react.
Lenders are getting twitchy about consumers with persistent debt who often rely on switching from one interest-free deal to another. To wean customers off of these deals, lenders have been reducing the availability of interest free credit cards and the length of interest free credit periods for the past 18 months.
Peter Dixon, a Commerzbank economist, suggests that pulling zero per cent credit cards and tightening terms is nowhere near enough. He says “if the Bank [of England] is really concerned about choking off credit demand, interest rates are going to have to rise further”.
This chimes with what the Bank has been saying for some time. It has consistently indicated that interest rates are set to increase in a slow and steady way.
Take heed of the Bank of England’s message
Increasing interest rates makes debt more expensive. It pushes up the cost of repaying debt including credit card debt.
We need to reign in our spending and cut debt now before it becomes too expensive to pay back. Swimmers beware, the tide is turning!
For Millennials, who have only ever experienced near zero percent interest rates, it will be difficult to comprehend the impact of rising interest rates on their finances. However, it is clear that UK interest rates have been unnaturally depressed during the past decade, but are now beginning their return to traditional levels.
If an historical examination of interest rate levels doesn’t convince consumers that it’s time to bring down their debt levels, perhaps the views of Jes Staley, the CEO of Barclays will be more persuasive.
Follow the lead of big money and take precautions
When asked why he is refusing to sell his company’s investment bank, the part described by many as the ‘risky casino side of the bank’, he pulls his Barclaycard out his wallet saying that Barclaycard is now the riskiest part of Barclays, not the investment bank. He insists that he needs to retain the investment bank to hedge against huge losses in the credit card business, when consumers begin to default on record levels of debt as interest rates begin to rise.
When big money institutions like Barclays start taking precautions for the turning economic tide, it’s time that we should too.
If you don’t want to be caught skinny dipping when the sea of debt dries up, it’s time to cut spending and pay down liabilities.