Past Articles for June, 2006

Mike Naylor, principal researcher at Which?, said that thousands of people are at financial risk yet are still borrowing more.

“Undoubtedly people need to take responsibility for their borrowing,” said Mr Naylor. “There is a real danger that people are borrowing more and more and saving less. There are thousands of people at real financial risk.”

His warning comes as the Consumer Credit Counselling Service warns that the number of cases of “extreme debt” it dealt with doubled in the past year.

Mr Naylor said that credit cards had played a role in causing people to borrow more and more.

In addition to calling on consumers to take greater responsibility over their spending Mr Naylor said that banks need to be more responsible over who they issued credit to.

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An extra £9.3 billion was borrowed in May, which taken with credit card debt and other forms of credit, means that consumer debt now stands at £1.2 trillion.

However, Drew Wotherspoon of John Charcol, believes that this should not be an immediate cause for panic: “While £1 trillion in mortgage debt is a huge sum, when you consider the fact that there is an unmortgaged property wealth of around £3.6 trillion, this means that the UK’s loan-to-value is a mere 22 per cent, which is healthy to say the least.”

Yet the rise in credit has led others to become concerned, particularly at Citizens Advice where it says that it now deals with 1.25 million people with debt problems.

And Barry Naisbitt, chief economist at the Abbey said that consumer spending growth was not picking up which could destabilise the economy.

So while Ms Wotherspoon said she did not expect a crash in house prices in the immediate future, the rise in personal debt has given concern to many others.

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A uSwitch poll found that nearly two thirds of respondents did not realise there were typical charges of £17 involved in using credit card cheques and that they could incur extra interest.

“There is a danger that many of the people who these cheques are targeted at will already be at risk of falling into over-indebtedness, and the convenience of these cheques, coupled with the manner in which they are marketed by the credit card companies who issue them, could push them over the edge,” warned Nick White, head of personal finance at the price comparison website.

Credit card providers last year sent out 18 million of the cheques unsolicited and uSwitch claimed that people are not given sufficient information on the charges involved in using them.

Other drawbacks of using them include higher interest rates, one-off charges and the absence of an interest-free period.

Mr White called on better regulation and for tobacco-style “wealth warnings” to help stop people unwittingly taking on more debt.

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Sue Edwards, senior policy officer for the Citizens Advice bureau, said that of 1.25 million debt problems dealt with each year, owing to credit card providers was the most common.

“Credit card debt now ranks number one in the 1.25 million debt problems our bureaux deal with every year,” said Ms Edwards. “More and more people are finding themselves on the wrong side of the fine dividing line between manageable credit commitments and serious debt.”

The announcement comes as Barclaycard, Britain’s first ever credit card, celebrates its 40th anniversary.

Personal debt now stands at over £1 trillion and credit card spending alone accounts for £300 billion each year.

In light of the growing amount of people that Citizens Advice have to deal with due to such debt, Ms Edwards called for better financial education for people.

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Director of the BBA, Eric Leenders, said that access to credit from regulated sources was a “huge enabler” that helped stop people taking out informal arrangements at high interest rates.

“Any consumer who takes credit should have the protection that the law provides,” said Mr Leenders at a conference aimed at tackling debt levels.

“Increased access to credit over the last 20 to 25 years has been a huge enabler.”

However, he brushed off criticism that household debt now stood at 150 per cent of income, believing that those getting themselves into debt were a “minority issue”.

This is despite claims from the Money Advice Trust at the same conference that it no longer had enough staff to support the amount of people coming to it with debt problems.

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Robert Skinner, director general of the Money Advice Trust, told a conference looking at tackling the problem that debt requires early intervention.

He claimed that the increase in demand on debt helplines was due to a greater awareness of advice services among the general public and also “because of an increase in the number of people on the margins”.

“The littlest disruption in life will take them over the margins,” added Mr Skinner.

Mr Skinner said that his own agency had also seen more people come to it for help but demand was now outstripping the supply of staff.

He believed that better investment in support to allow people with large debt to get help earlier would benefit people living on the margins and help prevent a fall into financial chaos.

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Comments were made at a meeting of leading financial experts from Barclaycard, Which? and the Liberal Democrats to discuss ways to halt Britain’s soaring debt levels.

“People simply don’t plan ahead. Unless we get more into intervention rather than cure we will get into significant problems in the future,” said Vernon Everitt, director of the retail themes division at the FSA.

A meeting to discuss debt levels follows the Consumer Credit Counselling Service’s recent warning that the number of cases of “extreme debt” had doubled in the past year.

Mr Everitt added that debt was becoming a problem at an earlier age with the FSA now running programmes at universities to help students tackle their financial problems.

He proposed that banks and existing networks should provide earlier intervention over debt levels rather than giving help only when they became a significant problem.

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Even though the bank increased revenues by 15 per cent last year, bad debt charges have soared by 44 per cent and experts expect a similar pattern this year.

“The general industry trend is that defaults are increasing, competitive pressure is strong and the regulatory machine continues to whirl,” Richard Thompson, a partner at accountancy firm PricewaterhouseCoopers, told Reuters.

“We don’t see any immediate relief in defaults.”

Barclaycard was launched in 1966 and was originally aimed at a million customers who could only spend £100 and had to repay their balance in full each month.

Now with 1,300 providers and 70 million cards in circulation not requiring full repayment each month, credit card debt levels have soared to an average of £4,000 per adult.

This has contributed to a rise in bad debt charges in the UK such that Barclaycard, while celebrating 40 years in the country, is looking abroad to nations with fewer debt problems to secure its future.

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The British Bankers’ Association (BBA) has confirmed that borrowing on credit cards fell by £0.3 billion last month.

Industry watchers are interpreting the figures as a sign that Britain’s easy credit culture is beginning to wane, with borrowing still up over all.

Unsecured borrowing rose last month, with loans and overdrafts up by £0.7 billion. Borrowing on mortgages also increased substantially to £18.2 billion.

New borrowing on credit cards stood at £7,682 million in May, up 16 per cent on April. However, repayments outstripped spending, as Britons moved to clear existing debts.

David Dooks, BBA director of statistics, said: “Whilst May’s consumer credit data show an interchange of borrowing between credit cards and overdrafts, the increase in overall unsecured borrowing was in line with recent trends.”

The figures were released as the UK credit card industry celebrates its 40th anniversary.

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Research by Scottish Widows reveals that the number of people saving sufficiently for retirement has fallen, as has the proportion of income being put away by regular savers.

The report, which “provides one of the starkest warnings yet” of the UK’s burgeoning pensions crisis, shows just 46 per cent of the population are saving adequately for retirement, compared to 55 per cent last year.

Moreover, the amount people are putting aside is also declining, with workers saving just 5.8 per cent of their income, down on 7.9 per cent last year and considerably short of Scottish Widow’s recommended figure of 12 per cent.

Ian Naismith, head of pensions market development at Scottish Widows, described the news as “very disappointing”.

“Our figures show that four in every five people who aren’t relying on a final-salary pension are failing to save adequately for their retirement, and that two in five are saving nothing at all,” he said.

Mr Naismith warned: “With this level of under-saving, no-one can be in any doubt about the challenge facing us all when it comes to preparing for retirement.”

Those struggling to clear debts are among the least-prepared savers, as are women and the self-employed.

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