Rising debt having disproportionate effect on young people

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Following in the footsteps of the Bank of England and the Monetary Policy Committee, the FCA have flagged up the steep rise in household debt that occurred last year, warning that the debt-to-income ratio is expected to "rise to 149% by 2021" from its current level of 142%.

However, while the surging level of debt undoubtedly poses a threat to the wider economy and to homeowners, insofar as a "small interest rate rise could affect mortgage borrowers significantly", one particular group who haven't received much attention in all the concern over rising debt is young people.

As Government data and independent research consistently show, it's young people who are more affected by debt than anyone else. As such, any attempt to address the problem of increasing household debt must directly tackle the question of why so many younger men and women are more likely to find themselves relying too heavily on credit.

What is a 'young person'?

Of course, "young people" is something of a vague term, which is why it's worth narrowing down what exactly it covers.

Most specifically, it's been used to refer to people aged between 16 and 24, with the Office for National Statistics (ONS) using this range to highlight how younger people are in more debt than their older counterparts.

In a report from May 2016, for example, the ONS noted that between 2012-14 "the debt to income ratio for young people was much higher than for all other age groups."

It was 0.40, compared to 0.15 for the "average" UK individual, a difference which underlines just how heavily the national household debt burden falls on younger people compared to those of more advanced years.

And while the ONS' age bracket might be accused of being too narrow to fully substantiate this claim, other pieces of research show that younger people with more than 24 years under their belt also deal with disproportionately more debt.

For example, in their 2016 Statistics Yearbook, the debt charity StepChange wrote, "People are getting into debt at a younger age".

As a spokesperson of theirs explained to us, "Over the past five years, we have seen more and more young people coming to us for debt advice. Three in five people who seek our help are now under 40, while those under 25 now owe nearly £6,000 on average".

Once again, this increasing "infantilization" of debt shows that the issue of high household borrowing is falling disproportionately on the young, even though the alarmed commentary of the nation's financial institutions would it make it seem more like an abstract economic issue.

And the fact that StepChange's data includes people up to 39 years old shows that the problem affects everyone who could be considered "young", and not just the youngest and most financially inexperienced.

Stagnant incomes again

That younger people are more in debt and more affected by debt is important, and not simply because it reveals that rising levels of household debt are disproportionately affecting them.

It's important also because it indicates many of the underlying reasons as to why debt is rising in the UK, with the low incomes and unstable work of many younger people being a major factor.

For example, the income of the average 22- to 30-year-old has decreased by 8% since 2008, according to the Institute for Fiscal Studies.

Much of this drop is a result of younger working generations taking on an increasing amount of part-time and insecure employment. In March, for instance, the ONS observed that "people who report being on a "zero-hours contract" are more likely to be at the youngest end of the age range; 33% of people on "zero-hours contracts" are aged 16 to 24".

Because of this change in employment and the resulting drop in incomes, younger people have had less money to spend on life's necessities. Worse still, these necessities have been rising as of late, with inflation at 2.3% overtaking wage growth and house prices continuing to rise beyond inflation despite a relative slowdown.

Mental health

Such rises have put the cost of living well beyond the salaries of many young people, who as a result have had to turn to credit cards and personal loans in increasingly large numbers in order to make ends meet.

And the results of this are dangerous, and not just because a sudden rise in interest rates or unemployment will result in losses for banks.

It's dangerous because debt problems exact a very serious psychological toll.

For example, UK millennials placed second from bottom in a global survey on mental well-being published by the Varney Foundation in February.

They came behind only those millennials from Japan, with 54% of British respondents stating that money was the most common cause of the anxiety they regularly experience.

Ultimately, it's for this reason that the increases in UK household debt are most worrying, and not because banks risk having debtors default on repayments.

By predominantly hitting younger people, and by jeopardising their mental health, these increases risk the UK's future, which may end up being blighted by debt issues.

As StepChange explained to us, "We urgently need better safety nets to help them when they do fall into difficulty. Otherwise, they could be left battling a spiralling debt problem for many years to come.".