Economist John Maynard Keynes caused a bit of a revolution in economic principles back in the 1930s, when he noted that a robust economy is built not so much upon the actions of investors, but rather upon the actions of consumers – in short, that the health of an economy is based upon consumers having enough money to actually purchase things.
The Looming Consumer Debt Crisis: Can You Avoid Drowning?
This is reflected by the economies of many countries. Consumers and consumer debt are a driving force of their economies. He felt that government intervention in a free market was essential if extreme cycles of prosperity and depression were to be avoided. His theories are once again being discussed among economists who align themselves either with the free market or the call for a more tightly regulated economy.
Debt and the 2008 Economic Crisis
Following the most recent economic crisis, consumer spending is rising sharply, but in a way that should point to an essential element of Keynes’ principles: that consumption needs to be primarily funded by disposable income rather than debt. Consumer debt in the UK is a perennial cause for concern amongst economists, policymakers and debt charities alike, as well as being a growing problem in millions of UK households. As consumer debt continues to rise dramatically, we are left to ask ourselves, is the British economy being kept afloat by consumer debt, or being drowned by it?
Many observers lean towards the latter view, and consumers who are struggling with their own debt crises are searching frantically for a lifeboat. However, if you’re having a hard time keeping up with multiple credit card payments, debt consolidation may be a strategy worth considering. Different credit counseling agencies may offer some debt relief. Their debt consolidation programs, called debt management plans, can help you get back on track — but they can also be unnecessary and even detrimental when done through a poorly run organization or for the wrong reasons.
Red flags: Consumption outweighs productivity
In a healthy economy, consumer spending rises in reasonably similar proportion to manufacturing output. In the UK, however, manufacturing output is falling, even as consumer consumption fueled by debt is increasing to the point where it represents an average 145% of income. While much of this debt is in the form of mortgages, the portion represented by credit card debt continues to rise as people use credit cards not only to fund purchases but to pay for recurring expenses such as bills and even groceries.
In a March 2015 report by PricewaterhouseCoopers, it was projected that total non-mortgage debt in the UK, which includes personal loans, credit cards, and overdrafts, would rise to £10,000 per household by the end of 2016. Given the above-projected increase in credit card debt in particular since that report was published, £10,000 would seem to actually be an overly conservative figure.
It’s a straightforward and time-proven equation: When borrowing costs more, people borrow less. Yet the reality is more complicated. Crank up rates too fast and overstretched borrowers could struggle with the higher loan payments that go along with increased rates.
Expected increases in interest rates will compound the problem
The American Fed has announced that it is raising interest rates, albeit by only one quarter of a percent, but that it expects to implement modest incremental increases in the not-too-distant future. The general assumption is that the UK will follow suit with similar modest increases in order to try to normalise the economy here. Just to give an idea of what even modest increases will entail, a 30-year fixed mortgage on a £100,000 house would increase by roughly £42, should the interest rate increase from 4.5% to 5%.
Given the fact that interest rates charged on credit card accounts are significantly higher than those charged on mortgage loans, the percentage of increase on those non-mortgage debts would obviously be even more significant. Most consumers are not getting too concerned at this point. That said, Peer-to-peer (P2P) lender Zopa reported in early 2015 that the number of Brits consolidating credit card debts using long-term loans through Zopa had increased by 57 per cent year on year, an indication that there is some pressure being felt by consumers. Their concern is likely to be elevated significantly as the larger monthly bills, driven by increases in interest rates, start rolling in. In short, changes in interest rates could have profound effects for families who mortgages and other consumer debt.
Debt Consolidation Tools
While these debt consolidation loans can be helpful in working toward reducing your indebtedness, as well as reducing the total amount of your monthly payments, you need to both do your homework in determining whether debt consolidation will benefit you, and strengthen your resolve, so that you don’t eliminate your monthly savings by going even deeper into debt with the ensuing surplus in your budget. It could well make the difference between staying afloat or trying to swim with an anchor chained to your leg.
Consolidating Credit Card Debt
Consolidating your credit card debt can mean a few different things to consumers with debt. Most of the time it essentially means combining all of your debt into a single loan or paying your creditors through a single monthly payment. There are many different debt consolidation services that will set this up. It is important to read about different methods, because there are many different ways and terms to consolidate debt.
For example. you can consolidate credit card s by taking out a consolidation loan or using a debt consolidation or management company. Debt consolidation is a form of debt refinancing that entails taking out one loan to pay off many others. The way you get out of debt is by changing your habits. You need to commit to getting on a written game plan and sticking to it. Get an extra job and start paying off the debt. Live on less than you make. It is not rocket science, but it is emotional
Important Facts About Debt Consolidation
Remember, that by consolidating all of your debt, at the end of the say you are still paying 100 percent of your debt obligations to creditors. This is quite a bit different from discharging them in a bankruptcy or settling the debt.When you file bankruptcy or settle with creditors, you are often paying a much reduced amount.
In addition, after a debt consolidation, your credit report can take a negative hit if your monthly payments are less than what you would normally pay. Also, while consolidation is not factored into a credit score, some creditors notate that you’re paying through a third party, which can be a red flag to a lender or anyone else looking at the report.