Credit society living on borrowed time

If you are juggling with debts, you are probably facing the toughest time of the year. Many people get paid slightly early before Christmas, then overspend during the festive season and keep their fingers crossed until the credit card and other bills come in at the end of January.

'Most people will probably manage to pay the minimum off their credit card in January,' says Jill Stevens of Experian, Europe's largest credit reference agency. 'But some might find it more difficult in February and March. And once you get three months into arrears, most mainstream lenders will regard that as a serious issue.' You can then find yourself being refused credit and getting into a downward spiral on your debts.

If you can keep on the straight and narrow now, you will do yourself a big favour for the future. But if you get into financial difficulties, you can pay the cost for years. Government figures suggest that 7 per cent of the population is living on a knife edge, juggling their debts and liable to get into major problems.

Most people - particularly the young - are becoming used to living on credit. Low interest rates have encouraged us to borrow more. Consumer borrowing (excluding mortgages) has more than doubled to £140 billion (more than £3,000 for each adult) since 1995. Mortgage lending is now nearly £650bn (equal to £11,000 for each person in the country). An average of £1,600 is outstanding on each of the 30 million credit cards where the outstanding balance is not repaid in full in each month.

The withdrawal of student grants and introduction of university top-up fees has introduced young people to debt in a large way - often more than £10,000 while they are still in their teens. 'People who get through university are fairly used to debt from an early age,' says Matthew Whittaker of the Credit Card Research Group. 'There is an acceptance that we live in a credit society now.' He believes many people expect to have consumer debt for the rest of their lives.

If you are good at managing your money, you can probably get by even with large amounts of debt. But if you do not open brown envelopes or write letters to bank managers, you can quickly become one of the statistics. Citizens' Advice Bureaux have seen a 37 per cent jump in the number of enquiries they received on consumer credit over the last two years. The size of the average County Court judgment has increased from £865 in 1996 to £1,300 in 2000. And half the adult population have debts that they cannot repay in four months - a figure that rises to 65 per cent among the 25 to 34 age group, according to research conducted by the CPP Group.

There is a fear that any sharp rise in interest rates - unlikely but always possible - will push thousands of people into serious financial difficulties. Currently, about 7 per cent of disposable household income is spent on servicing debts. In 1991, when bank base rates were three times their current level of 4 per cent, people were spending 14 per cent of income on their debts.

The Bank of England and some lenders are starting to get edgy about the resilience of consumers. The Department of Trade and Industry has established an Overindebtedness Taskforce, which is expected to report this month on the nation's ability to continue maintaining its consumer debt. A consultation paper from Melanie Johnson, the Minister for Competition, Consumers and Markets, is due shortly dealing with lenders of 'extortionate credit' - companies that lend at annual rates of more than 100 per cent.

But steps are already being taken by some groups to get more sophisticated insights into potential debt problems. Lenders can now use a service from Experian where they can see how potentially risky an individual consumer is by looking at his or her credit card repayment record. People who have debts up to the limit on several credit cards but who repay the min imum due each month have not shown up as credit risks until now - but they will be highlighted under the new Experian facility for lenders. With 27 credit cards currently offering zero rates for five or six months on transferred balances, there is a lot of scope for people to transfer debt and postpone the evil day.

While for some, borrowing more than pays its way - such as with low rate mortgages on houses that then soar in value - many kinds of debt are best avoided. With a mortgage loan, you have an asset that you can sell if you get into trouble. But if you are buying clothes or paying for holidays, you have nothing to bail you out. And you come unprotected to those stages in life when you are vulnerable; leaving home, for instance, being refused credit, moving house, divorcing, having a child, finishing work or becoming ill.