What Is Household Debt

There is personal debt and then there is household debt. Personal debt is the money you owe creditors yourself, therefore no-one else is responsible for paying this off. Whereas household debt is different. But what is household debt, who is responsible and how can you reduce it?

Household Debt Statistics

Simply put, household debt is the combined debt of all members of your household. In the UK, this includes consumer debt and mortgages as well as car loans, student loans and credit cards.

In the UK, The Money Charity provides information, advice and guidance to people of all ages, helping them to manage their money well. They also compile debt statistics and here is the latest information;

• As of November 2020, the average total debt per UK household is £60,720.
• By 2025, this is predicted to rise to £83,308 per household.
• There is an increase of 7.3% in the average first time buyer house price in the year to November 2020
• This means it will take on average 10 years for a first time buyer to save for a house deposit, saving at the average rate out of an average UK income.
• Personal debt has gone up by an extra £408 per adult over the year from November 2019 to November 2020.

So you can see from these statistics that household debt is rising and this can have knock on affects for anyone.

Who Is Responsible For Household Debt

This can be a complex question. For example, if you live with other people then you are each individually responsible for your own debt. Every person has their own credit score which is an overview of your finances. Hence if you build up debt in your own name, then your partner cannot pay it off for you, nor are they responsible for your debt.

However, if you have taken out a joint mortgage under both names, then you are both equally responsible for the debt. This is the same for a car loan or any loan taken out under joint names. If you cannot pay it off, then the other person is equally responsible for making repayments on what they owe and this will affect both of you.

How Is It Measured?

Household debt is measured in different ways and what you see can depend on what country you live in. For example, in the UK, it’s high because it includes ‘mortgage secured loans’. This also includes what is known as ‘equity loans’ which is what you owe if you took out a loan against your house. Whereas, in the US, household debt is defined as what individuals personally owe which can include what they owe their landlord.

Signs Of Household Debt

Perhaps you’re not sure how much you currently owe. It’s a good idea to keep track.  You can do this by checking your credit score for free every 12 months through one of three credit agencies in the UK. Go to Equifax, Experian or TransUnion for this. Now you have the information to see how much you owe and if you need extra help with your repaying your debt.

Before your debt does get out of control, here are some of the signs to look for;

• You are finding it difficult to meet your monthly repayments
• Your debt is over 50% of what your household income is after tax and other deductions.
• You’re sending a large portion of what you earn to pay your household debt
• Or are you avoiding opening letters from creditors?

If any of these apply to you, it’s time to seek some help or support with your debt.

Why Is It Important To Keep Control

When it comes to your family, it’s important to stay in control of household debt because missing repayments can lead to difficult situations. For example, you could face bankruptcy which can lead to some of your valuable possessions being sold in order to pay off your debt. Or you could even lose your home if you can’t keep up with your mortgage repayments.

With a wider outlook in terms of the UK, there is a direct link between an increase in household debt and the financial recession of 2007-2012. This is because when one household in the economy is in trouble, it affects other households. Although access to credit is vital to individuals and businesses, too much easy credit can lead to a crash similar to the 2008 credit crunch.

What Can You Do To Reduce It

So if you want to reduce your household debt, what steps should you take? The first thing to do is to create a budget. Here are some other ideas;

• Write down what income you earn and what expenses you have each month.
• If you have any money left, try to pay off your debts in full as soon as possible (obviously this doesn’t have to include your mortgage)
• But if you can’t pay in full, then pay what you can. Anything is better than nothing. It’s always a good idea to pay over the minimum amount if you can as this will cut down on your interest period.
• Try to cut back on your spending. Is there anything you can cut out or reduce, perhaps a membership, or using less petrol, or eaten less takeaways? The money you save can build up over time to reducing your debt.
• If you can increase what you earn somehow, then do it. Perhaps you can talk to your line manager about a raise, or take on more responsibility which could lead to extra cash. Then make sure you put this aside to pay off debts.

Conclusion

Finally, household debt is not all bad. It plays a vital role in our day to day lives. For example, families need to borrow money to get a home. Individuals need to borrow money for a car to get to work. Consumers borrow credit to pay for items which help businesses to grow. Furthermore, it helps to drive the economy in the UK creating business and work opportunities.

However, if the debt becomes too much for your household, then there’s a chance you could be putting your home or possessions at risk. If you are struggling to regain control, then talk to a specialist debt adviser as soon as possible.