The Citizen’s Advice Bureau has said that the majority of requests for advice it receives are from individuals struggling with personal debt. In the year up until June, the charity handled 1.7 million cases, an increase of 20% on the previous year. This equates to roughly 6,600 queries every working day. One in three of the queries the organisation receives is regarding debt, which replaces welfare as the most common reason for contacting the CAB. The volume is so great that the organisation is running out of trained debt advisors and is struggling to recruit enough new personnel to work in the area.
Chief Executive of Citizen’s Advice, David Harker, commented: “These figures are worrying evidence that while many have enjoyed the benefits of the credit boom, a large and growing number of people continue to pay the price, becoming overwhelmed by serious debt that can have a devastating impact on their lives.”
The demographic most commonly affected by debt problems are young families. Having taken out a mortgage at what could prove to be the top of the house price cycle, and with interest rates going up, many young couples have taken out personal loans or credit cards in order to cover their costs. Other affected groups include over 65’s who spend on credit cards to supplement their retirement income, and young women who live on their own. These groups have seen growing numbers of people declared bankrupt, up from 28,000 in 2005 to 107,000 last year.
The Consumer Credit Counselling Service has noted that, whereas traditionally, bankruptcy usually stems from a significant change in individual’s personal circumstances, such as divorce, family death or unemployment, its chief cause now seems to be simply overspending.
The growth in the credit industry started in the 1990s. As the property market started making record gains (and continued to do so until recently), lenders were happy to issue money with property as the collateral. With the arrival of American specialist credit card firms such as MBNA, competition increased in the credit card market, which had previously been dominated by retail banks. Providers offered customers lots of cheap money, which people happily snapped up, and spent on anything from home improvements to holidays and cars, as well as day-to-day living expenses.
The result is record levels of debt across the UK, currently £1,354 billion. This has caused some concern that economic growth is underpinned more by growth of debt than by growth of output. Shadow Secretary of State for Work and Pensions, Philip Hammond commented on the current situation, saying; “An economy built on borrowed money is built on borrowed time.”
There will be concerns now as to how the ‘credit crunch’ which has rocked financial markets will filter through to consumers. As banks become concerned about their exposure to debt, and make the cost of borrowing more expensive, consumers should not be surprised to see these costs being transferred to them. Mortgage interest rates are likely to go up, particularly for customers of sub-prime lenders such as Northern Rock, and interest rates on credit cards are being revised as banks become concerned about the increasing number of people defaulting.
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