Climbing Out of a Debt Crisis

In mid-2015 the debt charity StepChange published a report revealing that 2.6 million people in the UK had a serious debt problem, and that an additional 8.8 million were facing moderate debt. The report described this debt crisis as “the new normal” and suggested ways to address the problem. It also explained how people who rely on credit to keep up after an “income shock” or a change of circumstances are substantially more likely to end up in severe problem debt than are those who are able to keep afloat by relying on benefits or on their own personal safety net of savings and spare income.

Most money experts and observers agree that the UK faces a debt and savings crisis, made worse by a shaky labour market and the increased use of zero-hour contracts. If you’re looking over the abyss into a debt hole, or if you’re already in one, you are certainly not alone.

How did we get here, and how do we get out?

Not everybody who relies on credit falls into severe or even moderate financial difficulty, but the fact that so many do makes it essential to understand the circumstances most likely to lead to these difficulties. The report found that people relying on credit were most likely to fall into severe problem debt after facing an outright loss of income – that is, a job loss or redundancy. The second most likely precursor of debt crisis was a sustained gap or reduction of income after taking a less well paid or less secure job. Other factors that can send an individual or family over the edge into a debt hole include pregnancy or a newborn baby, relationship breakdown, and an illness or accident that affects household income.

The StepChange report cited above is worth reading because it explains how we as a nation got to this point, and it also sheds light on the factors that most often contribute to serious debt problems. It is if nothing else an object lesson on the folly of existing on credit when one has no sustainable source of income. And it offers a few suggestions for plugging the holes in people’s safety nets, listing some of the key criteria for sensible government policies and schemes to do that.

Safety nets, the report emphasises, are more than just welfare benefits. Though welfare benefits are vital they’re currently insufficient for everyone to rely on to adjust to income shocks and changes in life circumstances. People need to create their own robust set of personal safety nets as well – including savings, insurance and spare income.

Could credit unions be a way out?

In recent years much has been written about credit unions as an alternative source for both saving and borrowing, particularly for the financially challenged. And indeed credit unions have developed a good reputation for serving low-income consumers. Credit unions are not only offering more affordable financing, they are also engaged in educational programs targeted to people of all ages, in an effort to increase financial literacy.

But the only way credit unions can continue to thrive and grow is to reach out to (and be invested in) by those with moderate and higher incomes. As the unions grow they will continue to offer innovative financial products for those who are under-served by more traditional institutions such as banks and conventional lenders.

If you’re trying to climb out of debt, or are interested in building your own personal safety net through savings, take a look at what your local credit union has to offer. Whether it’s a class on budgeting or debt management, or a sound savings scheme, you might be surprised at the ways a credit union can help you get back on track financially.

Another alternative for the credit-challenged

Borrowing from a credit union has sometimes been cited as a reasonable alternative to those high-interest short-term loans known as payday loans. This may or may not be the case for you. What if you find yourself strapped for cash and can’t get the money you need from a bank, credit union or conventional lender, or can’t get it as quickly as you need it? You might consider a payday loan, but only if it will not sink you deeper into your debt crisis.

Payday loans have received a lot of bad press but they can actually be a reasonable choice if they are used in a reasonable way, to wit: choose your lender carefully, and don’t rely on a payday loan as a regular source of income. When choosing a lender, ignore the adverts and the lenders’ web sites. What you need is third-party objectivity. Accordingly we have resources on this site that can help you compare payday lenders, and you can even read reviews from real customers. You can also apply for a loan from our site. You may not have the best credit, but you still have choices, and you can make the best choice only if you carefully research what’s available.

But remember our second caveat: Don’t rely on payday loans – or any type of loan, or credit for that matter – as a source of income. You can’t dig yourself out of a debt hole; you have to climb out. Make a resolution get your debt problem under control, and then to build up a safety net so you can avoid another crisis. Debt charities such as StepChange and Citizens Advice have abundant resources to help you, and this site does too. But the results depend on you not only educating yourself, but taking action as well.

Paul graduated in 2001 with a degree in Finance. Since then he has gone on to work for several of the UK's most well-known financial institutions.

An avid blogger and a huge football fan, Paul is here to guide you through the ins and outs of personal finance and perhaps save you some money in the process!

Leave a Comment

Your email address will not be published. Required fields are marked *