Impact and Responses to the Personal Debt Crisis in the United Kingdom - Coursework Example

PRIVATE DEBT - PUBLIC DISTRESS A Report on the Impact & Responses to the Personal Debt Crisis In the UK [Type the [29 March 2009] REPORT OUTLINE 1.0 Introduction: The UK Personal Debt Problem: How bad is it ................................. 3 2.0 The Search for Probable Causes of Debt ........................................................................3 2.1. Rising Interest Rates in Mortgage & Credit ..................................................................4 2.2. A Spending Spree Unchecked ..........................................................................................5 2.3 Low-Income, High-Debt Lifestyle .................................................................................. 5 2.4 Keeping Up With the Smiths's ........................................................................................ 6 2.5 Poor Advice to No-Advice-at-All .................................................................................... 6 3.0 The Real Cost of Private Debt ........................................................................................ 7 4.0 Conclusion: Towards Greater Financial Awareness .................................................... 8 5.0 Reference List ..................................................................................................................10 The UK Personal Debt Problem: How bad is it If the number of "how-to-get-out-of-debt" inquiries at the Citizens Advice Bureau were any indication of how bad the personal debt problem had become in the UK, then one can infer how gloomy things have become. Based on its tally, the bureau received 20% more enquiries from people in debt between 2006 and 2007 than the previous year. It is also the highest in 10 years (CAB, 2007). Creditaction, an online credit advisory organization, further reports these gloomy statistics: 1 in 33 people is estimated to become unemployed in 2009; 1 property is being repossessed by a bank every 10 minutes and 1 person goes bankrupt every 4.5 minutes in the UK (Creditaction, 2009). Seeing how things have gone south economically worldwide, one can only hope that governments, the global financial industry and more importantly, the private individual had better get their acts together. Citizens Advice Chief Executive David Harker cited the CAB statistics as "worrying evidence" that a large and growing number of people will continue to pay the price, and will become overwhelmed by serious debt impacting adversely on their lives. He further stressed that even more worrying are the "signs that people are struggling not only to repay credit, but also to afford day-to-day essentials" (CAB, 2007). The Search for Probable Causes of Debt According to a study that analyzed the impact of debt advice in the UK, there seemed to be three different types of debt that can be attributed to the following causes: changing circumstances, poor money management, and creditor behaviour. Changing circumstances typically included unemployment or a change in employment, illness, bereavement and/or separation from a partner. Although the factors which brought about these changes varied, the changes were commonly interlinked and their effect was generally the same: the difficulty interviewees experienced having to manage on a reduced income caused them to fall into debt or exacerbated an existing debt (Pleasence, P. et. al, 2006). Poor money management on the other hand is largely due to a complacent attitude towards financial literacy. Finally, the so-called "rogue" creditor behavior or the unscrupulous and borderline-usurious terms and policies that take advantage of the financially disadvantaged sectors of society. Even then, no singular universal definition as to how the explosive debt problem came to be can be arrived at by financial experts in both the government and private sectors. Thus, the challenge in coming up with the best strategy for reliving and controlling the debt crisis continues to be a heavily-contested area of study to date. Rising Interest Rates in Mortgage & Credit One online news source attributes this problem to UK's Monetary Policy Committee which increased the Bank of England base rate by 0.25% to 4.75% in 2006. In an attempt to stem inflation, four more increases followed throughout 2006 and 2007. However, this economic maneuver proved to be a bane rather than a boon as it brought unforeseen complications by way of increasing interest rates in mortgages and credit card payments that literally jolted people with two-year fixed mortgages upon finding that their sweet, fixed-interest rate deal had now become sour. As such, these people have had to cough up several hundred pounds more than what they have grown used to budgeting on the monthly mortgage payments. The rising interest rates also directly affected the credit industry as monthly credit card payments rose. This too had the equally disabling effect among the many people who find that they are now unable to meet the rising credit card repayment rates. A Spending Spree Unchecked But really, among the biggest factors which aggravated the UK's debt problem is consumer spending, which is especially true in the most recent years leading up to the global recession. In a survey report involving British youths ages 18-24, one respondent expressed his views on money thus: "It's all about money if you haven't got any you can't do anything. The more you've got the more fun you can have and the nicer stuff you can buy." Certainly in this example, money is presented as a means for lavish display of wealth (Synovate, 2004). Such frivolous attitude towards money only further complicated the downward credit spiral. Low-Income, High-Debt Lifestyle "For many people on a low income, high interest loans may be the only credit available." (Going Debt-Free,(nd)) Thus, when faced with higher budget deficits, swiping the card, without the requisite reality-check has become a recurring habit, with some even going as far as to justify credit with uncollected income-- presupposing future income for present expenses. According to this article, some lenders are well aware of this and will use advertising targeted at this particular sector of the public. "With APR rates as high as 183%, lending like this is still not illegal but many people claim it is immoral. Unfortunately until the government steps in there will be no change in this type of high interest credit lending" (Going Debt-Free,(nd)). Even dual income earning households are still sometimes hard-pressed to make ends meet given the rising house prices, interest rates, taxes, and their dependents. Thus, some reported incidence of families "funding their lifestyles by juggling credit cards; taking out one loan as soon as the other has ended" (Going Debt-Free,(nd)). Keeping Up With the Smiths's "Lifestyle Envy" or how some people tend to spend impractically to gain peer approval or be perceived to be on equal social footing as their upscale neighbors despite an opposite financial reality is now being eyed as a tell-tale sign of high-debt, high-risk consumer spending. Some people have taken advantage of easily available credit in order to live well beyond their means. Fancy vacations, fast cars and dream homes, and even plastic surgery are now being purchased by some people without a regard for interest rates or long term payments, a lifestyle afforded by less-than scrupulous lending firms (The IVA (nd)). In some instances, lifestyle envy can lead to cross-charging multiple credit cards mostly on impulse to buy un-needed goods. Poor Advice to No-Advice-at-All Not surprisingly, ignorance and lack of interest to sound financial advice among the debt-ridden is a common denominator. In a survey that aimed to identify the information needs among the 18-24 age group, many of the respondents felt that financial decision making did not yet affect them and was something to be considered when you were older (Synovate, 2005). In follow-up qualitative interviews with respondents to the 2004 English and Welsh Civil and Social Justice (CSJS) Survey, respondents are largely uniformed about the free debt management advisory services until they are already deep in debt and have been referred to various government agencies for counsel on appropriate legal remedies to their otherwise dreary circumstances (Pettigrew, N et. al., 2007). These findings point to the urgent need for greater awareness and ready access to sound financial advice, not only among those demographics mentioned, but more importantly for the upcoming generations as they stand a better chance of avoiding the pitfalls of lavish consumer spending and undisciplined behavior towards personal finance. The Real Cost of Private Debt According to a report evaluating the impact of private debt on public debt advice service, the average cost per debt problem to the public and in lost economic output can be estimated at over 1000, with more serious problems involving costs of many times this amount (Pettigrew, N et. al., 2007). Among the i-Pod Generation, research by the Reform and Chartered Insurance Institute reveals that 50% of the 18 - 34-year olds surveyed had debts (excluding mortgages ) up to 10,000 and 20% had debts (excluding mortgages) greater than 10,000. Nearly a third admitted to having no savings at all (Credit Action, 2009). Great financial stress can significantly lead to a range of adverse reactions that have already been documented. Analysis of the 2004 CSJS data mentioned that debt problems impact negatively on people's health, personal relationships, housing and economic circumstances and confidence. With the reported the Citizen Advice Bureaus reporting an average of 7,241 new debt problems every day, it will only be a matter of time when the personal debt problem will balloon into a national pandemic with no visible end in sight. This will further impact on major life plans of whole generations of Britons. According to research from CreditExpert.co.uk, 36 million (75 per cent) UK adults have put or are planning to put on hold key life plans for 2009, such as moving jobs and having a baby. Furthermore, over half (55 per cent) of all adults are feeling anxious about reaching their goals in life, mainly due to concerns over affordability. Further alarming statistics on the national impact of personal debt in UK: Britain's personal debt increased by 1 million every 40.6 minutes in January 2009, well over a third of the daily interest that the British Government pays of the national debt which amounts to about 91million (Credit Action, 2009). Though data on the over-all impact of debt-related stress and the accompanying costs to productivity and public resources dedicated to address the problem is still being calculated and is yet to be fully appreciated, it is already undeniable that the problem is taking a monumental toll on the national morale. This alone is perhaps more than enough reason for national alarm. Towards Greater Financial Awareness In Autumn 2004 the Department for Constitutional Affairs (DCA) commissioned the Legal Services Research Centre (LSRC) to investigate the broad impact of debt advice. From this initiative came the Consumer Credit White Paper, launched in December 2003, which in turn signaled the Government's intention to improve advice and support for those who are disadvantaged through debt. Thus, an 'Action Plan' which was aimed at tackling over- indebtedness and the establishment of a Financial Inclusion Fund followed-- a noble attempt that came too little, too late. Nonetheless, it is a step in the right direction. In the aftermath of the global economic recession, any financial advice is deemed welcome, especially by the millions of erstwhile frivolous consumers who are caught flatfooted and unaware. Speaking to a government think-tank on Financial Education in Perth, Australia, Sue Lewis, the UK Treasury's head of Savings and Investments disclosed some of the British government's goals in its effort to instill proper financial education among its young citizens such as teaching them the life skill of being able to balance the household budget, keep track of money, plan ahead, make informed decisions about financial products and keep abreast of financial matters. (Perth, Commerce Department, 2008) Through the UK's Financial Services Authority, a national strategy for financial education is now being rolled out to raise the level of awareness for financial capability within the population. By focusing on education, information and advisory services, the FSA's national strategy aims to build Financial Capability based on the seven areas or themes, namely: schools, young adults, retirement, families, advice, workplace and finally but certainly not least, a major theme on debt. This initiative may be considered one of the most pro-active and seemingly ambitious educational campaigns that the British government has embarked on to date and one that has its evident merits, as it seeks to include a vast cross-section of the young population. This process becomes even more engaging as it will entail the students to co-manage their own trust fund. It is certainly a reason for hope and anticipation as the country bravely attempts to rise from the financial rubble wrought largely by poor or uniformed financial choices and outright ignorance of basic financial discipline. An old proverb states that "It takes a village to raise a child". This adage could never be more true now, as both the government, the schools, the community and the family, each private individual must work together to bring about a mindset change especially regarding the all-important skill of managing personal finance among the next generation. To achieve this objective, it's never too late, nor too soon to start. References List Citizens Advice Bureau (2007). "Debt problems hit all time high, Citizens Advice figures show" [online] Avaiable at: http://www.citizensadvice.org.uk/index/pressoffice/press_index/press_20070910.htm [03/28/09] Credit Action. "March 2009 Debt Statistics" [online] Available at: http://www.creditaction.org.uk/debt-statistics.html [03/28/09] Going Debt Free (nd). "How Lifestyle Can Impact Debt". [online] Available: http://www.goingdebtfree.co.uk/lifestyle-and-debt.html, [03/28/09] Perth Department of Commerce (2008). "Insight on financial literacy plan" Available:http://www.commerce.wa.gov.au/Corporate/Media/statements/2008/February/Insight_on_financial_literacy_.html,[03/28/09] Pettigrew, N., Taylor, J., Simpson, C., Lancaster, J. and Madden, R. (2007) "Live now, save later Young people, saving and pensions", Department for Work and Pensions, Research Report No 438, Available: http://www.fsa.gov.uk/pubs/consumer-research/crpr44.pdf [03/28/09] Pleasence, P., Buck, A., Balmer,N. and Williams, K."A Helping Hand" The Impact of Debt Advice on People's Lives (2006), Legal Services Research Centre, Legal Services Commission. Raven, Francis (2005) Digital Divide Network. "Financial Literacy: A Basic Skill for Social Mobility" Available: http://www.digitaldivide.net/articles/view.phpArticleID=420 [03/28/09] Synovate (2005). Financial Services Authority. "Young people (18-24) and their financial information needs" Available at: http://www.fsa.gov.uk/pubs/consumer-research/crpr44.pdf [03/28/09] The IVA (nd). "Why Debt is Such a Problem in the UK" [online] Available at: http://www.theiva.co.uk/debt-problems-uk.html, [03/28/09] Read More