Should we worry about Household Debt?

Introduction

According to the government, the average UK household debt in 2024 was 125% of disposable income, putting the UK in the top half of OECD spending. With more people in debt than ever before, volatility in interest rates and a cost-of-living crisis, the question is should we worry about household debt?

The UK’s Debt Position

We are a credit using nation, from cards to Klarna, mortgages to car loans, the UK population has been encouraged to ‘buy now and pay later’ from an early age. Socially and culturally credit is both acceptable and affordable. However, the Scandinavians and Australians leave the British behind with up to 227% household debt versus disposable income. At the other end of the scale people of the Czech Republic stand at less than 60%.

Why the Disparity?

For Scandinavians and Australians property prices lead to higher mortgages and therefore greater debt. A strong economy for both regions gives people and institutions the confidence to lend more, meaning the question should we worry about household debt isn’t a significant consideration for these nations. There is confidence in getting employment and in the welfare state, so leveraging credit isn’t seen as a major risk.

At the other end of the scale, people in countries where the economy isn’t stable, employment not as plentiful, wages not as high and property cheaper, credit isn’t as popular. Examples would include Greece. Also, culturally credit may not be popular. For instance, in Germany credit and debt are frowned upon and something to be avoided and not embraced, so debt stands at 78% of disposable income.

Is Household Debt a bad thing?

‘Buy now pay later’ can help with people’s lifestyles and life changes. A growing family might necessitate a larger car or house, by waiting until you can pay cash for either, the kids might have grown up! A young person might go into debt to fund their education, viewing it as an investment in themselves and a promise of a higher salary in the future.

For the economy, the ability to borrow or receive credit can help smooth out downward periods in the economic cycle and reduce shocks to both households and the economy. Cheap credit may also stimulate the economy as people may borrow more when interest rates are low and increase their spending.

So should we worry about Household Debt?

We should worry about irresponsible lending or irresponsible borrowing. Households living beyond their means with no contingency fund, unemployment cover or disposable assets are at risk of a major shock should health or employment be affected.

Lenders who are not prudent about who they lend to are also in danger of making serious mistakes with lasting consequences (the financial crash of 2008 still has repercussions today).

Individuals, households, lenders, regulators and the government all have a responsibility when it comes to credit and debt. The impact of financial hardship on a household is second only to health in how it can change lives – and not for the better. Managed debt can help households thrive and enjoy life, going on holiday, buying a dog, extending the home. Ultimately life is for living and we only get one chance at it.

Conclusion

The UK is a nation which utilises credit but is by no means the highest in the OECD. We have strong financial rules put in place by the FCA and other regulators, however we have a weak welfare state when it comes to looking after the middle classes in times of unemployment. As a rule a household should have 3-6 months contingency to cover outgoings should health or unemployment affect earnings, this is the accepted cushion to minimise financial hardship.

At Saascoms we develop software widely used by the credit and collections industry, and have a unique view of the market from both sides.