Consumer body warns on Britain's 'credit binge

The chairwoman of the National Consumer Council will add her voice to the growing clamour on debt today, when she calls for banks and lenders to help bring Britain's love-affair with credit under control.

Levels of personal debt have risen exponentially over the past decade. Historically low interest rates have given rise to a rash of cheap mortgage and credit card deals, and for a generation which is leaving university owing an average ?9,000 and for whom debt is an unavoidable part of life, the temptation to take on more at low rates can be hard to resist.

Outstanding credit card debt has soared by 62% in the last four years, with the average adult now owing ?1,140 on plastic, and mortgage borrowing has risen by 25% over the last year.
According to the charity Credit Action, total consumers borrowing is currently rising by ?10.7bn a month.

Speaking at the British Bankers' Association's annual conference, Deidre Hutton expressed her concern at the situation. "Britain is in the grip of a credit binge," she said. "Stories about people getting themselves into serious debt difficulties are becoming commonplace. Last week, we heard how Aqua credit card offered a nine-year-old girl a ?1,000 credit limit. Then there was the story of the man with a ?30,000 salary who managed to rack up debts of ?80,000 - and will now spend the rest of his life paying off his debts.

"Consumers have their part to play in managing how they borrow, but banks need to act responsibly too. They should not be offering unsolicited automatic credit increases, and cheques on credit card accounts if they haven't properly assessed borrowers' circumstances. They must fully explain the terms and conditions to customers. Otherwise, how are borrowers able to make sensible choices?"

Ms Hutton called for the lenders to put their house in order ahead of legislation, and promoted the adoption of the NCC's four-point plan for fair credit, which advocates better assessment of the borrowers' financial situations, a single method of calculating APRs, clearer information on marketing materials and fair treatment for customers who get into difficulties.

The NCC's stance reflects that taken by the Conservative party earlier this week, when it declared its intention to hold a commission on household debt. The commission, which will be headed by the economist Lord Griffiths, will gather evidence on why families fall into debt and how they can be helped. "On current trends, household debt will break through the ?1 trillion barrier this autumn," said the shadow chancellor, Oliver Letwin, on announcing the plans for the commission. "For increasing numbers of people, debt is becoming a serious problem."

The credit card provider, MORE TH>N, was the first lender to reply to Ms Hutton's comments, responding with research of its own that acknowledged the issues she raised. According to MORE TH>N's figures, over a quarter of people (27%) have two or more credit cards, and 39% of those who do have no idea what APRs they are being charged.

"There is nothing fundamentally wrong with multiple card holdings if people are aware of the deals they have signed up for and can manage the credit they have," said the head of MORE TH>N credit cards, Graham Hollebon. "It is more concerning that significant numbers do not know what interest rate they are paying - the chances are that they are living with uncompetitive deals.

"We want to see a more grown up attitude towards credit. The industry should share more information so that we know exactly the true level of indebtedness of each applicant. This way we can go some way to prevent those not managing their personal debt sufficiently from getting themselves into a worse situation.

"But we must also say that not all debt is bad, and most people pay off their balance in full or can comfortably meet their monthly payments due to ever rising incomes."

His views appeared to be supported by another survey released today by economic consultancy Oxera, who said that despite concerns about high levels of borrowing, in fact only a minority of households were struggling to keep up with repayments.

According to its survey, only around 4% of households believed they had borrowed too much, and the proportion of people facing problems had remained broadly stable over the past nine years. Furthermore, while the levels of debt in relation to income were rising, it was not out of line with increases seen in other major economies.

It added that most surveys on arrears did not differentiate between people who could not meet repayments and those who had simply missed a payment because they had forgotten about it.

"Over the last five years, many reports have suggested over-indebtedness is a growing problem in the UK and that society stands on the precipice of a debt disaster," said Paul Rodford, of the Association of Payment Clearing Services, who commissioned the research.
"Yet the data we collect within our industries indicates that this is not the case."

But the Liberal Democrat Treasury spokesman, Vince Cable, disputed this conclusion, pointing out that the report had been carried out within very narrow parameters.

"It does not take sufficient account of the probability of changing circumstances," he said. "At the moment, most people are able to cope with unsecured debt, and we should be thankful for that. However, if incomes stagnate, unemployment rises, or interest rates go up, their level of debt may not be sustainable.

"It is also the case that debt, and the availability of loans, is being very aggressively marketed and promoted. It is time the banking industry took sensible precautions to take account of wider economic indicators, rather than simply taking a gamble while wearing rose-tinted spectacles," said Mr Cable.