Demand for Credit Card Borrowing Slumps

THURSDAY, DECEMBER 08, 2005

It seems that UK consumers are at last beginning to rein in their credit card spending. After a summer of dire warnings from government agencies and other independent associations, consumers are using their plastic less and less, and doing more to try and resolve their debt problems.

According to a recent survey by the Combined Insurance company, six out of ten people with consumer debts would default on loan and credit card repayments within three months of being unemployed, facing the prospect of bankruptcy or having to negotiate an Individual Voluntary Agreement (IVA) with their creditors.

The current level of personal debt in the UK is currently around the £ 1 trillion mark, fuelled by previous excessive consumer spending and easy credit. Much of this debt is in the form of unsecured loans, and the banks have reportedly set aside £ 3 billion this year to cover bad debts.

Too many people have borrowed more they can afford, with few assets to fall back on when they become unemployed or ill. Previously the economy has been buoyant, but a downturn would see further increases in the present record levels of people facing insolvency. Combined Insurance have advised that people should keep back the equivalent of three months salary to help them through the difficult times. However, many young people, who are first-time homebuyers, simply can’t afford to save such amounts. According to the survey, 50% of first-time buyers would be unable to keep up their payments, and 60% would default on loan and credit card repayments soon after becoming jobless.

So against this background of record debt levels and insolvency cases, it’s no surprise that credit card spending dropped by a record £ 146 million this August. Indeed, before this summer, the last net drop in credit card spending was observed 12 years ago, according to the British Bankers’ Association.

As UK Chancellor Gordon Brown prepares for his next budget, and considers increases in personal taxation, there’s no doubt he will have to consider their impact on disposable income, and it’s consequences for the mounting UK debt problem.