iPod Generation

3 November 2008

ePolitix.com, Julia Goldsworthy MP, 3 November 2008

There is a generational divide opening up in our society – and nowhere is this more apparent than in our personal finances. Older people are more likely to own their own homes, have better pensions, more savings and less debt than those at the start of their working life.

My own experiences are pretty typical – my first steps to financial independence were about a decade ago, when I took out a student loan and an overdraft before I went to university. A few years later, without a hefty mortgage, and help from my parents with the deposit, I would not have secured a foothold on the housing ladder.

For younger generations, debt had become the norm – at a time in people's lives when it is far from clear what income and future earnings they will have to repay that debt.

For many banks, sustaining this attitude was in their interests – performing debts make money. So the incentive on their side was to ensure that people stayed in exactly that situation, never quite paying off their debts, but not missing the minimum payments either. In a stable economy this seemed to work well for everyone.

But, of course, we are now in a very different world. The cost of borrowing for banks has rocketed, and suddenly they need more deposits on their books. Defaults are on the increase, and borrowing is becoming more difficult. It's a situation that does not helping first-time buyers, but it is changing the incentives to save – even though interest rates look set to stay low.

Perhaps the best interests of young people and the financial services sector are beginning to align, in a way that they have not in previous years. Alongside this we need to see better financial education, improved access to independent financial advice, and credit ratings that assess the ability to pay, as well as repayment history.

The banks need to understand that young people will only trust financial services once they start putting the long-term interests of their younger customers first. Ultimately, this could be to everyone's benefit, but no doubt the process will be a painful one for many.