Young people in debt crisis – it’s official

Iona was on Radio 5 Live this morning as the expert on young people’s money in special features on debt.

Financial Conduct Authority chief Andrew Bailey has warned of a “pronounced build-up of indebtedness” among young people.  He says it’s affordability of basic living costs, not reckless borrowing, that is largely to blame.  Meanwhile the Insolvency Service has found higher levels of concern over debt among the under-34s.

On Radio 5 Live’s ‘Wake Up to Money’, there was a lengthy discussion on the build-up of debt, people living within their means, and the tensions between spending and saving.

Iona said: “Intergenerational fairness has been on the agenda for some time but only recently have we started scrutinising the role played by debt in keeping young people afloat…you are much more likely to be struggling to get by if you are under 50.

“Young people have commercial pressures and peer influence coming through their phone 24/7, and against a backdrop of stagnant wages, rising house prices, and the cost of living rising for students. So it’s not surprising that young people look to credit as a convenient instant solution, using it to supplement their income, not for something specific which is different.

“The problem cuts across income and class, I have come across people struggling with debt from well-off backgrounds, it’s about whether you were taught about money at home. A whole generation has missed out on any financial education in the curriculum.

“ There is a lot of sympathy for the argument that there should be a test before you take out a credit card – many young people don’t understand APR, minimum repayments and all the mechanics of credit cards. Providers play on that lack of knowledge, and apathy, and short-term thinking. It’ s understandable because when you leave school you haven’t got those skills, and by the time you do acquire them it’s too late.

“There are certain things that could be done…minimum repayment levels could be scrapped, or at the very least the minimum level should stay the same as the debt is repaid.  It is also absolute madness that we have credit limits raised automatically for so many people – in my view that’s just an invitation to spend unnecessarily.”

On payday loans Iona said:  “There is an argument that payday loans are much better regulated, on the other hand illegal lending is on the rise which is notoriously difficult to check. Concern has moved to overdrafts, but charges are very difficult to understand.  APR is supposed to be a benchmark but with overdrafts it goes out of the window, because there is a whole world of charges and fees, and it is much more difficult to understand what you are getting into.”

Later the station assembled a group of young people, two had student debt of £44,000  (Yomi, 20 ) and £60,000  (Alice, 23) respectively, the third Ruby (22) had credit card debt of £2,500 and a Paypal account of £800.

The ex-students consoled themselves that it didn’t have to be repaid for now, and said they had not been tempted into taking out a credit card despite constant invitations to do so.

Ruby said she had started her card when she was in a well-paid job, which had ended, but had felt she “might as well max out” on the card and add Paypal once she was already in debt.

An hour later the discussion resumed, with Iona trying to offer them some perspective. The students discussed their attitudes to debt, lack of savings, and the jobs issue.

Yomi said his mum had always put aside an emergency pot for him, which he will only be allowed to touch “when I can make sensible financial decisions”.

Alice said the job issue was difficult, the best jobs were in London but you needed to have experience or work for a year virtually unpaid.

Iona said: “It is very difficult psychologically to think about that huge amount of money, it’s hanging over me as well as you guys so I  completely relate. It maybe makes sense to think of it as a tax on future income. If you think you will be earning a lot, it might make sense to try and clear that debt sooner rather than later. If you are not sure, it’s probably better to regard it as a tax on future earnings.

“This also reflects the big debate we are having now about student finance, because the other issue that has come up  is the cost of living while you are at university, because maintenance grants have been scrapped and it is not surprising that students are coming out the other side with more debt and it becomes second nature to them.”

Ruby said she was making a minimum repayment of £100 a month on her credit card and it wasn’t making a dent in the actual debt. Iona said Ruby’s debt was manageable, and she had a good credit rating. “That bodes pretty well for your ability to get a 0% balance transfer  credit card. That basically means you can shift your debt onto a new card, and not pay interest on it, of course you would have to figure out how to repay it so you don’t end up with balance on the card, that would defeat the object of the exercise.”  Iona suggested Ruby’s Paypal debt could be managed in the same way.

On saving, Iona said:  “We are talking about a multi-stage process, when we talked about savings that’s further down the line, at a point when you know exactly what is coming in and going out, and you are in the habit of budgeting every month – there are some really useful apps that can help you with that, you can transfer money onto a prepaid card and see exactly what you are spending and where.”

To Yomi’s warning that contactless cards could make spending too easy on nights out, Iona said if you find yourself doing “zombie spending” one trick was to “take out cash the old-fashioned way”, withdrawing only what you really needed for the night.

On Alice’s issue of trying to get into the jobs market, moving to a new place, needing a deposit for a flat. Iona said: “Ironically that is a scenario where having a credit card could work in your favour, if it’s for a lump sum payment and you know exactly what it’s for. It’s a case of knowing exactly what money is coming in and having a plan to pay it off within the 0% interest rate deal.”  Alice said that was helpful.  Presenter Coletta thanked the young people for being so open, on national radio, about their money.

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