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Iona Bain: Hello, I'm Iona Bain and welcome along to A Little
Iona Bain: Bit Richer, brought to you by Legal and General. From
Iona Bain: credit cards to car finance and buy- now- pay- later,
Iona Bain: debt has quietly become a normal part of life for
Iona Bain: our generation. But just because its common doesn't mean it's
Iona Bain: easy to deal with or talk about. Whether you're just
Iona Bain: about keeping on top of repayments or starting to feel
Iona Bain: the pressure, living with and managing debt can be a struggle.
Iona Bain: Debt is a fact of life, something we all have
Iona Bain: to deal with, but hopefully we can do that without shame.
Iona Bain: That's why I'm so pleased to be joined by an
Iona Bain: incredible woman who's done loads of work to help raise
Iona Bain: awareness of debt and the support available for those struggling
Iona Bain: with it. That's Claer Barrett. Claer is the consumer editor at
Iona Bain: The Financial Times, a columnist, broadcaster, and the force behind
Iona Bain: the FT's financial literacy and inclusion campaign. Welcome, Claer.
Claer Barrett: Thanks for having me, Iona.
Iona Bain: Claer, how common is it for Millennials in the UK
Iona Bain: to live with debt? How has society's attitude towards debt
Iona Bain: changed over the years?
Claer Barrett: Well, debt is a fact of life. The reason for
Claer Barrett: that is because life has become more expensive for subsequent generations.
Claer Barrett: Before we go any further, let's just say if you
Claer Barrett: have debt, whether it's good debt or bad debt, it's
Claer Barrett: not a personal failing. This is something that is affecting
Claer Barrett: all of us. But also, it's not something that eating
Claer Barrett: fewer avocados can necessarily resolve. There are all kinds of
Claer Barrett: reasons for that. Salaries stagnating, particularly for graduates who have
Claer Barrett: got ever- higher amounts of student loan debt that they
Claer Barrett: need to repay coming off their salaries every month. So
Claer Barrett: much so, that there's a new term that I've become
Claer Barrett: aware of. Negative wealth. Have you ever heard of this?
Iona Bain: I can't say I have.
Claer Barrett: Okay. Negative wealth is where your debts, which include student loans,
Claer Barrett: but also overdrafts, credit cards, any buy- now- pay- later
Claer Barrett: add up to more than the value of your assets.
Claer Barrett: Things that you own that are worth money, like a
Claer Barrett: car or a property, say. So much so, around one-
Claer Barrett: third of 25-to- 34- year- olds in the UK, it's said,
Claer Barrett: are in negative wealth. Now this is a survey by
Claer Barrett: the Fairness Foundation, so this is proper research. The biggest
Claer Barrett: reason why one group of people might be in negative
Claer Barrett: wealth compared to positive wealth is, guess what? Being on
Claer Barrett: the property ladder. If you've managed to get on the
Claer Barrett: property ladder, you will have an asset. But for those
Claer Barrett: of us that didn't have that helping hand, be paying
Claer Barrett: extortionate rents in the private sector. The big takeaway for
Claer Barrett: me here is that education and knowledge about debt so
Claer Barrett: that we can minimize the wrong type of debt and
Claer Barrett: be aware of the problems that we can get into
Claer Barrett: if we take out too much debt is embedded in
Claer Barrett: us at an early age because that is going to
Claer Barrett: make the biggest difference for when the negative will hopefully
Claer Barrett: turn positive later in life.
Iona Bain: Give us a sense of the kinds of debts that
Iona Bain: young people are leaning on in order to get through life?
Claer Barrett: Well, people talk about good debts and bad debts. Let's
Claer Barrett: start with the good. The most obvious example is probably
Claer Barrett: student loans and mortgages. This is why we need to
Claer Barrett: understand how debt works, how things like credit scores affect
Claer Barrett: how much money we can borrow in the future. It's
Claer Barrett: those forms of so- called bad debts that could put
Claer Barrett: you down the rankings in terms of your credit score.
Claer Barrett: Things like credit cards, if not managed well. Things like buy- now- pay- later.
Claer Barrett: If you take out too many, then you're going to
Claer Barrett: have to rely on credit cards or your overdraft to
Claer Barrett: pay the bills, because overdraft is typically 40% interest annually,
Claer Barrett: credit cards typically 20% interest annually. But one- in- five
Claer Barrett: people in the UK have an impaired credit score, which
Claer Barrett: mean if they want to borrow using a credit card,
Claer Barrett: it's even more expensive. Typically, an interest rate per year
Claer Barrett: of around 40 or even 50 percent if you want
Claer Barrett: to borrow money. There's some common forms of bad debt
Claer Barrett: and bad practices managing debt. It's often unfortunately, Iona, young
Claer Barrett: people who don't understand what they're getting into who make those mistakes.
Claer Barrett: Then they can hang around and blight your credit file
Claer Barrett: for six or seven years.
Iona Bain: Well, let's get into why that can turn into such
Iona Bain: a problem for young people further down the line. Just
Iona Bain: explain what your credit score is and what it's based on?
Claer Barrett: Basically, your credit score is an indication that lenders will
Claer Barrett: look at at how creditworthy you are. If I were to
Claer Barrett: lend you money, would you pay it back on time
Claer Barrett: and would you make those repayments regularly? Because if you can,
Claer Barrett: then I'll be more likely to reward you with a
Claer Barrett: lower rate of interest. Whereas somebody who has paid bills
Claer Barrett: late or has borrowed more than they can afford, has
Claer Barrett: got into difficulty paying that money back, you can see
Claer Barrett: that they've had problems in the past because lenders can
Claer Barrett: look through your credit file, and they might charge you
Claer Barrett: then a higher rate of interest if they're going to
Claer Barrett: let you borrow. Or they might decide not to lend
Claer Barrett: to you at all. Let's say you apply for a
Claer Barrett: credit card. The credit card company says, " Here you go,
Claer Barrett: here's a card. You've got a credit balance of £ 10,000." Technically,
Claer Barrett: you could take that card, you could go out, and you could
Claer Barrett: buy something for £ 10,000. But the reason why you shouldn't
Claer Barrett: do that is because of something called credit utilisation. Now,
Claer Barrett: this is really big issue with people's credit scores. If
Claer Barrett: you borrow more than 30% of what your credit limit is,
Claer Barrett: that's not going to trouble the lender too much. But
Claer Barrett: if you were to borrow over 50% of the limit they think, " Oh,
Claer Barrett: they're utilising quite a lot of credit. This is making
Claer Barrett: them a higher risk." If they want to borrow any
Claer Barrett: more money maybe further down the line for a mortgage,
Claer Barrett: all of those repayments are going to eat away into
Claer Barrett: their monthly pay packets. It's going to make their affordability
Claer Barrett: look much worse if they're applying for a bigger loan
Claer Barrett: because more of their money is going towards servicing their debts.
Claer Barrett: That could also start to pull down your credit scores.
Claer Barrett: If you've got a really high rate of interest on a
Claer Barrett: credit card, commonly 20%, often much higher, over time, the
Claer Barrett: magic of compounding is going to work against you. The
Claer Barrett: amount of time it will take you to pay off
Claer Barrett: that balance and the amount of interest that you'll repay
Claer Barrett: on top of the money that you've actually borrowed could
Claer Barrett: really surprise you. If you know that before you took
Claer Barrett: out the credit card, would you have taken it out?
Iona Bain: It feels like a hidden trap, whereby if you don't
Iona Bain: know that you're not really supposed to spend over 50%
Iona Bain: of the credit available to you, and yet you're punished
Iona Bain: for it later, I would imagine a lot of young
Iona Bain: people would say, " That's really unfair." If people are feeling
Iona Bain: like they have to take our a credit card in order to
Iona Bain: improve their credit score, but don't really want to for
Iona Bain: all the reasons we've discussed, what are the alternatives?
Claer Barrett: People think that it's going to boost my credit score
Claer Barrett: if I do this, it can actually end up getting
Claer Barrett: people into deeper financial doo- doo because they can end up spending
Claer Barrett: more money and have a bigger debt to repay and
Claer Barrett: affect their affordability levels going forward. I would say go
Claer Barrett: to your credit report, check first of all that there
Claer Barrett: aren't any mistakes on there that need to be corrected.
Claer Barrett: But Experian, one of the credit file people, they offer
Claer Barrett: a service whereby with open banking, you can share your
Claer Barrett: details with them. They can count regular payments that you're
Claer Barrett: making towards household bills, which could include paying your rent
Claer Barrett: on time, paying our council tax on time that could
Claer Barrett: boost your score by as much by 100 points just by
Claer Barrett: linking up your data.
Iona Bain: It's just about getting the basics right, that'll do an
Iona Bain: awful lot for your credit score?
Claer Barrett: Absolutely. Then when you do come to apply for a mortgage,
Claer Barrett: going through a mortgage broker who will do a detailed
Claer Barrett: breakdown of your outgoings. The crucial thing that mortgage lenders
Claer Barrett: are looking at is affordability. How much money do you
Claer Barrett: have left at the end of month after meeting your
Claer Barrett: other commitments? Of course, those commitments include debt repayments. Student
Claer Barrett: loans are a factor of that. But if you've got
Claer Barrett: a big credit card balance, even if it's on a
Claer Barrett: naught percent interest, that's hanging around you. They can see
Claer Barrett: eventually you're going to have to pay that off and
Claer Barrett: that's the sort of thing that could count against you
Claer Barrett: when you come to apply for more credit. It's a two-
Claer Barrett: way street.
Iona Bain: How can people distinguish between good and bad debt? We've
Iona Bain: talked about some examples, but what are the key questions
Iona Bain: that people need to ask themselves when they're taking out
Iona Bain: debt in order to make sure that they're going to
Iona Bain: use it in a responsible way?
Claer Barrett: Well, I think if you're taking out any form of
Claer Barrett: debt to pay off another debt, that is a red flag.
Claer Barrett: You should be thinking to yourself, " Hang on a minute.
Claer Barrett: Are things getting out of control here?"
Iona Bain: What about buy- now- pay- later? That's grown in popularity massively,
Iona Bain: but what are the risks with that?
Claer Barrett: Okay. Buy- now- pay- later, the big attraction of it
Claer Barrett: of course is that the payments are interest- free and
Claer Barrett: they can be split over three months. Frankly, if you're
Claer Barrett: on a tight budget, that could be a godsend rather
Claer Barrett: than paying 20%, 40% or more to borrow money on
Claer Barrett: a credit card. But let's step back a bit and
Claer Barrett: think about how the business model of buy- now- pay-
Claer Barrett: later actually works. Why is it that they don't charge
Claer Barrett: us interest? How, therefore, do these gigantic businesses make money?
Claer Barrett: The answer is the retailers pay them. If a retailer
Claer Barrett: offers buy- now- pay- later on its website, it knows
Claer Barrett: it will sell more stuff. We will feel like we've
Claer Barrett: been given magic permission to spend more money. We might
Claer Barrett: have bought a pair of jeans, but now we know
Claer Barrett: that we can pay in three. Then we'll buy a
Claer Barrett: pair of jeans, a top, and a pair of shoes.
Claer Barrett: It can make us spend more.
Iona Bain: Spend more than we necessarily would have wanted to.
Claer Barrett: At the moment, we have to self- regulate. A thrifty
Claer Barrett: tip that I've used for years is whenever I find
Claer Barrett: myself doom- scrolling online, putting items into the basket, I
Claer Barrett: just leave them there for 24 hours. The amount of
Claer Barrett: times I think, 24 hours later, " Actually, I've got a
Claer Barrett: top exactly like that in my wardrobe already." Or, better still,
Claer Barrett: I can find one on vintage. Better for the planet,
Claer Barrett: better for your pocket. But the amount of psychology that
Claer Barrett: these websites, the lifestyle they're selling, it's very, very hard
Claer Barrett: to resist.
Iona Bain: It's about building up that awareness of how the business
Iona Bain: models of credit card providers and buy- now- pay- later
Iona Bain: providers operate so that we can then make informed decisions.
Claer Barrett: Absolutely, Iona.
Iona Bain: What are some practical steps that people can take to
Iona Bain: get on top of their debt repayments and reduce their
Iona Bain: debt over time?
Claer Barrett: I think the biggest thing is the bigger picture. Now,
Claer Barrett: a lot of the time, people lose track of how
Claer Barrett: much debt they've actually got because it's spread across multiple cards, overdrafts,
Claer Barrett: different accounts, different sources of debt that they're frantically trying to
Claer Barrett: keep on top of. I think facing up to it
Claer Barrett: and setting out what you've got where, but also having
Claer Barrett: a bigger think about how has that debt been created.
Claer Barrett: How has it built up? What have you actually spent
Claer Barrett: the money on? Looking back at your statements will give
Claer Barrett: you an idea, but often it's the cost of the
Claer Barrett: interest which is the biggest factor in there pushing up
Claer Barrett: the payments. We talk about often two methods for clearing debts,
Claer Barrett: the avalanche method and the snowball method. Briefly, the avalanche
Claer Barrett: method is listing all your debts, working out which one
Claer Barrett: has got the most expensive interest rate. There will be
Claer Barrett: one on there that's quite killer. You say, " Okay, I'm
Claer Barrett: going to prioritize paying off that debt. I'll pay the
Claer Barrett: minimum repayment on all of the others so they're cheaper,
Claer Barrett: lower interest rates. But the one that's got the real sky-
Claer Barrett: high interest rate, it's in my interest to clear that
Claer Barrett: the fastest." I'm going to avalanche any spare money I've
Claer Barrett: got into killing that card. The other method, the snowball method,
Claer Barrett: is that you target the smallest debt first. You might think, " Okay,
Claer Barrett: well what's the point in doing that?" But psychologically, if
Claer Barrett: you can say, " I've now cleared that store card, that's gone,"
Claer Barrett: that could give you the momentum to then go on
Claer Barrett: and tackle the next one. Maybe you do a snowball first,
Claer Barrett: and then you do an avalanche. But the key with
Claer Barrett: all of these things is get rid of the credit
Claer Barrett: card when you've paid it off. All too often, I
Claer Barrett: see people clearing debts on cards, they keep the card open.
Claer Barrett: That's why I said look at why those debts built
Claer Barrett: up in the first place, because whatever habit or problem
Claer Barrett: that was caused for you to build this up in
Claer Barrett: the first place, if you haven't closed off the card,
Claer Barrett: then it's easy sadly for that to build up once again.
Iona Bain: Then you're right back to square one.
Claer Barrett: Exactly.
Iona Bain: Which you don't want. What can someone do if they
Iona Bain: already have debt issues, they feel that that debt is
Iona Bain: getting out of control, what solutions or organizations can they
Iona Bain: turn to?
Claer Barrett: Okay. If you are listening to this podcast and you
Claer Barrett: have even a glimmer of a feeling that you might
Claer Barrett: benefit from speaking to somebody about your debts, maybe you
Claer Barrett: don't know how much they add up to. That's quite common, denial. Thinking, " Right,
Claer Barrett: I'm not going to look at this. They're still saying
Claer Barrett: I can borrow. I think I might borrow more money
Claer Barrett: to pay off that card." Or you've had debt that's
Claer Barrett: been hanging around for a long time that you're only
Claer Barrett: paying off the minimum payment on so the interest costs, again,
Claer Barrett: are getting higher and higher. If you find that the
Claer Barrett: value of your debt isn't really falling anymore, it seems
Claer Barrett: to be growing, these are all signs, take it from me,
Claer Barrett: that you would benefit from talking to a debt charity. Now,
Claer Barrett: most people would say, " I don't need help from a
Claer Barrett: charity! I'm not a charity case." But the reason why you should is, number one,
Claer Barrett: most of the funding for debt charities comes from the
Claer Barrett: finance industry.
Iona Bain: Ah.
Claer Barrett: Because they have a legal and regulatory obligation to help
Claer Barrett: customers who are in problem debt. A certain percentage of
Claer Barrett: customers will fall into problem debt, no matter how big
Claer Barrett: the warnings are. The second big fact is that it is
Claer Barrett: never too early to ask for help if you're worried
Claer Barrett: about the debts you're in. As human beings, we're hard-
Claer Barrett: wired to try and sort these problems out for ourselves. Typically,
Claer Barrett: we'll look for solutions online. But the problem with that
Claer Barrett: is is that the kind of things that come up in internet search engines,
Claer Barrett: the sponsored ads are often organizations that profit from selling
Claer Barrett: people in problem debt a particular kind of solution.
Iona Bain: Like a debt management plan?
Claer Barrett: Exactly. An IVA is another one, a form of insolvency
Claer Barrett: where you pay a fee to enter into an arrangement. Now,
Claer Barrett: that might be the right solution for you. But if
Claer Barrett: you're going to a provider who only offers that as a solution,
Claer Barrett: something else including a debt relief order where they can
Claer Barrett: wipe off some of your debt, you never have to
Claer Barrett: pay them back, you're not going to find out about
Claer Barrett: those kinds of solutions until you speak to an independent
Claer Barrett: debt charity who can work out what the best solution
Claer Barrett: is for you. It doesn't have a motivation to put
Claer Barrett: you in one kind of plan or another. When you've
Claer Barrett: done that, you've got a much better chance of getting
Claer Barrett: out of debt and getting your finances back on track. The
Claer Barrett: final tip I'd say, you don't have to talk to a
Claer Barrett: debt charity on the phone. A lot of people find,
Claer Barrett: because there's a shame attached to debt, wrongly attached to
Claer Barrett: being in debt, sometimes people just can't face having a
Claer Barrett: conversation about it. But all of the big debt charities
Claer Barrett: tend to do web chat now, which I think is
Claer Barrett: a fantastic innovation. I would say Step Change, they're one
Claer Barrett: of the biggest debt charities in Britain. Citizen's Advice, particularly
Claer Barrett: good if you've got problems with bills that you can't pay,
Claer Barrett: things like council tax which can get quite nasty very quickly.
Claer Barrett: Then if you've got any sort of intermingling of business
Claer Barrett: debts and personal debts, maybe you're self- employed, Business Debt
Claer Barrett: Line are the place to go. All of these places
Claer Barrett: are free to contact and the advice that they give
Claer Barrett: you is free.
Iona Bain: That's really good to know that you could even do
Iona Bain: this on your lunch break at work. Or when you
Iona Bain: get home from work and you've got the TV on,
Iona Bain: you could just drop them a line, reach out. Claer,
Iona Bain: what are the three tips that you would give to
Iona Bain: someone listening who wants to reduce their debt and make
Iona Bain: sure that they are debt smart in the future?
Claer Barrett: I would say just have a great awareness generally of your finances, what's
Claer Barrett: coming in, what's going out. You don't need to sit
Claer Barrett: down and do a formal budget. There are lots of
Claer Barrett: apps nowadays, like Snoop and Emma, that use open banking
Claer Barrett: to go through your income and expenditure and make suggestions.
Claer Barrett: But just be aware of what you've got. And also,
Claer Barrett: the interest rates that you're paying on some of these
Claer Barrett: debts and being super on top of when repayments for
Claer Barrett: things like buy- now- pay- later are due. If you
Claer Barrett: don't meet them on time, you'll get a fine. It
Claer Barrett: might be interest- free, but that is going to cost
Claer Barrett: you money ultimately. Finally, I would say go online. There
Claer Barrett: are so many good free resources online from the main
Claer Barrett: debt charities themselves. Step Change, Citizen's Advice, and also Business
Claer Barrett: Debt Line if you're self- employed. There's a wealth of
Claer Barrett: information out there. We've also go my charity that I'm a
Claer Barrett: trustee of, FLIC, the Financial Literacy and Inclusion Campaign. We've
Claer Barrett: made a free guide to managing debt containing all kinds
Claer Barrett: of help, resources, links to further sources of support and information.
Claer Barrett: I believe, Iona, that you have helpfully attached it to
Claer Barrett: the show notes of today's episode.
Iona Bain: Well, there we go. A good first step for people
Iona Bain: to check out. Wonderful. Thank you so much, Claer.
Claer Barrett: Thank you for having me.
Iona Bain: Thank you so much, Claer, some really great advice there. Next time,
Iona Bain: friend of the show and financial advisor Emmanuel Asuquo will
Iona Bain: be here to help us put good friction in our finances.
Iona Bain: This podcast is brought to you by LNG. You can
Iona Bain: keep up with the show on YouTube, TikTok, and Instagram @legalandgeneral. I'd love
Iona Bain: it if you could follow the podcast, leave us a review,
Iona Bain: and help others get a little bit richer, too. Thanks
Iona Bain: for listening. Until next time, see you soon.