Young people facing 'soaring debts'

peer group hands©

YOUNG people are becoming increasingly indebted, owing an average of more than £12,000, a report from Citizens Advice suggests.

That's more than three times as much it was in 2006, when people aged between 17 and 24 owed an average of £3,988.

The composition of their debts is changing too, with less being owed on credit cards but much more being owed in the form of formal loans and arrears.

In addition, the average young person also owed friends or family more than £1,000, compared to just £30 six years previously.

Sharp spike

The charity say young people came to them with more than 102,000 debt issues in the past year, an increase of 21% over the previous year.

Looking at the data they've analysed, it's not hard to see why.

According to detailed figures from the most recent Wealth and Assets Survey, carried out by the Office for National Statistics, people aged under 25 had average debts of £12,251 in 2012 - the last year for which there is detailed data.

As mentioned above, that's more than three times higher than it was from 2006 to 2008.

But showing just how quickly levels of debt have begun to rise for this age group, it's more than twice as much as the average debt was in 2008-2010.

youth debt

SOURCE: Citizens Advice, Unsecured and insecure? Available here [pdf]

The two largest parts of the bar - the dark blue and the purple - correspond to student loans and formal loans respectively.

Given the age group we're looking at, it's understandable that student loans account for around 42% of the average debt.

But what's more worrying is the fact that formal loans - from banks and other loan providers - also account for a similar amount of the debt.

In 2006, the average formal loan accounted for £969 of the £3,988 someone under 25 owed - but by 2012 the average formal loan amount owed was almost £4,580.

In the meantime, the amount this age group owed on credit cards shrank slightly, from £332 to £234.

Bills vs credit

What's not shown in the ONS figures, but has become increasingly evident to consumer charities in recent times, is the extent to which falling into arrears is fuelling debts.

As Citizens Advice point out, a high credit card bill isn't necessarily a sign of financial difficulty.

When we start to feel the squeeze, the sensible thing to do is prioritise our bills - and while we can make minimum repayments on a credit card, we can't do the same with our rent and other bills.

So falling behind with those bills is a sign that perhaps there's something more deeply wrong with someone's financial situation.

More than 20% of under-25s are behind with at least one household bill, compared to just over 10% of 25-24-year-olds, and only 2% of 60-64-year-olds.

Some of this may be about learning money management - but combined with the fact that around 70% of a young person's income is accounted for by debt, there would seem to be bigger issues here than not knowing how to set up a direct debit.

Learning bad habits?

As mentioned above, a certain amount of the high level of debt among 17-24-year-olds can be put down to age and circumstance - they're the most likely to have little income but high costs in the form of student fees and debts, for example.

The good news - at the moment - is that people in the next age group up have far lower levels of debt than 17-24-year-olds, with a corresponding drop in the proportion owed in student and personal loans.

But their debts appear to be on the rise too.

Further, figures from the British Bankers' Association (BBA) show that personal loans are increasing in popularity again, as is borrowing by using an overdraft:

bba borrowing statistics august 2015

SOURCE: BBA Monthly Statistics Review, August. Available here [pdf]

Citizens Advice say it's not clear yet what kind of impact the level of indebtedness younger people find themselves in will have in the future.

But for a generation already well used to taking out formal loans, it could be that habits learned young haunt them that much more as they get older.

Debt mountain

According to a report written for the Bank of England, unsecured debt including student loans, borrowing from friends and family, credit cards, personal loans and that caused by being in arrears - now has a value of £170 billion.

Citizens Advice ask, as we have previously, whether this is because household spending is rising faster than household incomes.

And despite secured lending - like mortgages, for example - having received a few boosts recently, Citizens Advice say official growth forecasts for that kind of borrowing have been downgraded.

Bank of England data shows that unsecured borrowing is currently growing by around 2% per quarter; it grew by 6% over the course of last year, compared with secured debt growing at just 1.5% over the same period.

Analysts have suggested that putting more on our credit cards shows increasing levels of consumer confidence - basically, we think we can afford to borrow more, because we're think we can pay it back more easily in the near future.

But at the same time, Citizens Advice say there's been a "steady and significant" decline in "the savings ratio" - which, again, suggests that spending is recovering quicker than our incomes are.

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