UK household debt surpasses £2 trillion amid soaring cost of living

A report by PwC's Strategy & UK Consumer Credit Confidence shows that household debt has surpassed £2 trillion for the first time in UK history. The recently released debt profile is just a little below the UK's Gross Domestic Profit (GDP).

Furthermore, the research also reveals that consumers in the UK find it hard to respond to straightforward multiple-choice financial questions, despite the fact that the majority of UK consumers are confident while making financial decisions.

Responding to this, Simon Westcott, Strategy and UK Financial Services Lead at PwC UK expressed the company's interest in the perception of British citizens regarding the management of their personal finances. Westcott said this, given that household debt, for the first time, has now surpassed £2 trillion, and that the rising cost of living has reduced the people's disposable income, with the UK grocery inflation hitting a new high Of 17.5 per cent.

He noted that while making financial decisions might be unsettling for some individuals, the research conducted shows that 88 per cent of UK consumers are either very sure or confident in their capacity to make sound financial decisions.

According to Westcott, with just 37 per cent of people properly predicting the value range for a mortgage and 31 per cent for a personal loan, there seems to be a gap between these confidence levels and consumers' real comprehension of everyday financial products.

"The figures are startling as it's clear that a good understanding of financial products, and how they work, can boost resilience, and somewhat mitigate against compounding pressures inflicted by high inflation," the Strategy and UK Financial Services Lead stressed.

He explained that regulators, businesses and the government must collaborate to increase financial literacy and support the ability of people to save and invest.

UK consumers score low on financial literacy

The literacy data suggests that there has been no advancement in financial literacy, with 31 per cent of respondents picking the correct answer for a loan repayment question, a 2 per cent decrease from the result in 2017.

PwC's results further revealed notable disparity by income band in the percentage of UK consumers who correctly answered the financial multiple-choice questions. For instance, consumers making £70,000 per annum were more likely to give correct answers to questions relating to mortgages compared to those earning less than £20,000 per annum. The two income classes recorded 69 per cent and 31 per cent, respectively.

Secured household debt up by 4.1 per cent from 2022, unsecured debt hits record level

About 80 per cent of household debt is secured against real estate, totalling £1,619 billion in current secured debt, up 4.1 per cent from the last year.

Meanwhile, the overall amount of unsecured debt has surpassed £400 billion, which equals a record-high household debt level of £14,300. Unsecured debt increased by nearly £900 per home in the last year alone, increasing at a 7.2 per cent annual rate. The report's data also showed a sharp decrease in consumer confidence in their capacity to obtain loans.

Soaring cost of living shrinks consumers' credit confidence

The PwC Consumer Credit Confidence Index, used to compile the report, indicates that confidence has reverted to 2013 levels and is only slightly over 2009. Around 31 per cent of respondents anticipate a pay freeze or decrease in the upcoming year.

The fact that 3.3 million individuals, or 10 per cent of employed individuals, decided to leave their pension plans in the last year due to the growing cost of living is another indication of the financial difficulties some consumers are experiencing. This number increases for renters, who make up 17 per cent of the 18 to 24 age group and are more likely to have opted out

In his remarks, the Financial Services Lead at PwC UK, Isabelle Jenkins, said, "What the data seems to be showing is that across the board, the combination of higher mortgage payments, bills, transport, and food shopping will have necessitated a tightening of budgets".

Jenkins further explained that for other people, this might have proposed a significant reduction in spending or steps like choosing not to participate in a pension or long-term savings plan.

The Financial Services Lead noted that for the majority of borrowers, credit serves a crucial purpose by balancing expenses and income, which, if manageable, can be advantageous. For other people, Jenkins believes this might have required a significant reduction in spending or even actions like choosing not to participate in a long-term savings plan or pension.

Jenkins continued, "However, it is critical that we keep an eye out for borrowing "red flags", noting that there are ways by which UK consumers "can get support from lenders who should be able to provide help tailored to their circumstances".

According to Jenkins, more needs to be done to encourage more people to feel comfortable asking for advice. He further explained that only about 26 per cent of UK consumers seek financial institutions like banks for advice or information. In contrast, 39 per cent of consumers turn to family and friends while 38 per cent rely on search engines on the internet.

Poor financial resilience and rising costs dangerous to the economy

The data revealing financial literacy was developed by PwC in partnership with global public opinion data company YouGov. In March 2022, the Financial Conduct Authority (FCA) mentioned that more than half of those surveyed by YouGov at the start of 2022 believed their financial condition would worsen over the coming year, up from around a third in October 2021.

Although the percentage of people in the UK with poor levels of financial resilience has remained relatively consistent since the start of 2020, it may alter in the coming months.

According to FCA, rising expenses and low levels of resilience are a dangerous combination that could put millions of individuals in severe financial trouble and have far-reaching implications on the economy.