Credit Card Debt – Is it out of control?
By the end of 2008, UK personal debt had reached a total of £1,457 billion, an increase of £50 billion in 12 months. Individual consumer credit borrowing was £233 billion. The average household debt in the UK is £9,550, which excludes mortgages, and £59,700 including mortgages. The UK paid £81.8 billion in personal debt interest repayments alone in the last 12 months.
With these figures in mind, it is not surprising that UK borrowers account for one third of unsecured debt in Western Europe. On average, each British adult has double the debt of any other European. Many major European countries have a culture of saving and frugality, especially in countries such as France and Germany.
The UK's "buy now, pay later" consumer culture has led to unprecedented levels of personal debt. Credit cards allow people to live beyond their means. Whilst they can be useful to people suffering from emergency situations in their lives, individuals who persist in using their credit cards for day-to-day purchases will inevitably spend more than they can really afford if they were forced to pay with cash. Credit cards are too convenient and delay the expenditure by a few weeks rather than using the cash-equivalent debit cards. UK credit card debt continues to swell as more people in the UK find it increasingly difficult to meet their interest and capital repayments, causing severe concerns that credit card debt is becoming out of control. UK credit card interest rates have also increased, adding more fuel to the fire.
The best advice for those who are in serious credit card debt is to destroy their cards and make adjustments to their expenditure to clear the debts they have. It is easy to forget that the interest accrues on interest owing as well as on the capital spent, even if the minimum suggested amount on a bill is paid. More worrying still is that a serious number of UK consumers have no idea of how much they owe on credit cards at any given point in time. In 2008, the average person owed 150 per cent of their annual income, according to the Bank of England, which is half as much again than in 10 years previously.
This consumer borrowing crisis is yet another pressing concern for Alistair Darling. George Osborne, Shadow Chancellor of the Exchequer, has accused Gordon Brown of "presiding over an economy that has been increasingly built on debt, leaving many families vulnerable to the triple blow of rising mortgage rates, taxes and energy bills."
Even young borrowers are caught up in the debt crisis, with an average 18 to 24-year-old owing approximately £2,860 in unsecured borrowing. The same research revealed that 108,000 18 to 24-year-olds had credit card debts of more than £5,000.
One in 10 credit cardholders only pay the minimum repayment on their statement each month. Research in July 2007 showed that millions of consumers faced remaining in debt for up to 30 years if they only paid the minimum repayments on their credit cards every month. On average, credit card companies set minimum monthly repayments at 2.6% of the outstanding balance, with 35 card providers setting them at just 2%. USwitch found that if someone with an average credit card debt of £1,812 repaid their balance at a rate of just 2% a month it would take 29 years and two months to clear the debt and cost them £2,858 in interest too.
Despite the increasing levels of consumer debt in the UK, some credit card lenders have reduced their minimum monthly repayment, which essentially means anyone repaying their credit debts in this way will take even longer to clear their debt and pay even more in interest. Those credit card lenders actually intended to help customers ease their budget burden in the face of rising interest rates, but this is unlikely to help people if their time in debt is prolonged.
Credit card lenders have been accused of not setting out the implications of making the minimum payment clearly to their customers. Paying slightly more than the minimum amount will pay off the debt quicker and also reduce the amount of interest paid on the debt overall. The UK's Banking Code states that minimum repayments should cover at least the interest charged each month.
In answer to the crisis, some card companies have taken the decision to either reduce their customers' spending limits, or to remove their credit cards altogether. One year ago, internet bank Egg stopped 161,000 customers from using their cards, citing a desire to shrink its exposure to people with poor credit records. Other banks and building societies have since followed suit.