Christina Hirst: Avoiding debt complacency

Low interest rates have encouraged people to borrow more
Low interest rates have encouraged people to borrow more
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Keeping track of borrowing can ensure debts don’t run out of control when interest rates rise.

Where the majority of us have taken on board some form of credit, whether that be on a credit card, via a mortgage or otherwise, the thought of getting ourselves into what feels like an inescapable debt is something we feel falls to others, never believing that we could ever be that irresponsible with our finances to let that happen to us.

Unfortunately however, it may be easier to do than you first thought.

Statistically, it appears that as a nation our confidence is once again growing when it comes to the UK economy. Looking at the housing market, British Bankers’ Association figures for the high street banks revealed that borrowing in the mortgage market has remained strong, with the number of mortgage approvals in September up 24 per cent in comparison to the previous year and remortgaging up 40 per cent.

The statistics also revealed an increase in spending, with a 6 per cent increase in credit card purchases in comparison to the previous year. According to June 2015 figures in a report by credit rating agency Moody’s, consumer spending in general has grown at its fastest pace in five years, with household spending climbing 1.4 per cent in comparison to the previous year. But what has caused this increase in confidence and is it necessarily a good thing?

Falling rates of unemployment, lower costs for consumers, as well as an all-time low interest rate are all factors that can all be attributed to the increase in confidence.

Figures from the Money Charity reveal that the number of people unemployed for over a year fell by 142 people per day in the second quarter of 2015, and these falling unemployment numbers have meant that more and more households now have money to spend.

Not only this, but due to the price wars between supermarkets and the battle to keep costs low for consumers, and a six-year low in the cost of petrol, households have been left with slightly more money to burn for the first time in years.

Yet perhaps the most influential factor is the current record low interest rate of just 0.5 per cent. Not only are people taking advantage of low interest rates when it comes to applying for a mortgage, but personal borrowing via credit cards has also seen a hike over the past year.

Figures from the Money Charity revealed that in August, the average credit card debt per household equated to £2,337 and that 58 per cent of UK credit cards bared some amount of interest on them.

Such rock-bottom interest rates have meant the cost of borrowing has become much more affordable for UK households, whether that be in the form of a mortgage, money spent on a credit card or other forms of borrowing. Inevitably however, these rates will rise and in the process the true cost of household debt will be unveiled, leaving many households under financial strain.

A recent report by PwC warned that a 2 per cent rise in interest rates would leave UK households needing an additional £1,000 per year to cover the extra cost of the interest. The extra interest on total household debt, including mortgage repayments, would consume a larger amount of income, meaning where people currently may be handling their debts successfully, it may become much more difficult to do so in the future.

So, with levels of debt rising alongside improving levels of consumer confidence, how do we ensure that when interest rates do inevitably rise, we don’t find ourselves crushed beneath a mountain of debt?

Firstly, it’s important to understand just how much debt you owe. Credit cards, store cards, overdrafts, loans; they all add up, and unfortunately, so does the interest. There are, however, helpful tools online that you can take advantage of, such as Royal Bank of Scotland’s Debt Calculator, which collates your various debts together and provides you with an amount to pay off in order to become debt free within a chosen period.

Secondly, ensuring you’re in the know when it comes to borrowing is important to avoid getting yourself into debt before you even realise it’s happening. For example, before taking out credit under an introductory offer, be aware of how much you’ll need to repay once the offer period comes to an end to ensure the repayments are something you can sustain.

It’s also vital to pay back at least the minimum amount on your credit card bill each month to avoid missing a repayment. Ensure you’re aware of your credit limit to avoid exceeding it, as both these scenarios could see you negatively affecting your credit card score and affect your chances of gaining credit in the future.

It’s important we don’t become complacent when it comes to borrowing. Educating ourselves on interest rates and keeping track of what we’re borrowing will ensure that when changes in the economy do occur, we won’t be left with a debt we can’t control.

• Christina Hirst works on behalf of RBS in the creation of financial content