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Don’t be misled, credit card debt remains high
According to the headlines, there has been a dramatic drop in the use of credit cards. “Credit card borrowing shows biggest decline in six years” said the Guardian, with most other headline writers following the Bank of England’s line in reporting that borrowing on cards fell £147 million in July.
The impression given is of consumers retrenching and paying down their credit cards. It is, however, somewhat misleading when you consider that the total amount outstanding on credit cards as of July is £54.5 billion. True, it has been declining gently since reaching £62 billion in January 2010, but that was a sudden spike, the result of a Christmas surge that saw an extra £8.3 billion put on plastic in just one month.
Don’t forget the write-offs
However, the current figure of credit card debt is higher than in the same month in 2007, 2008 and 2009. It should also be borne in mind that it does not take into account the bad debts that the banks have had to write off. Over the past year write-offs have amounted to £2.8 billion. Since the start of 2008, an extraordinary £17.6 billion has been written off. That’s equivalent to 32% of the current outstanding credit card debt written off in just four-and-a-half years. Given the degree of default, it’s no wonder rates are so high.
£100 borrowed from Wonga becomes greater than the US national debt within seven years!
Many people can’t get credit from the banks of course, a major factor being the rapid growth of payday loans, where Wonga had a reported APR of 4,214%. At that rate, as shown here, a loan of £100 becomes more than the US national debt within seven years! It is thought the payday loans market is now worth almost £2 billion pounds and increasingly rapidly. Scottish Widows recently reported that payday loans among 18-34 year olds had doubled in just a year.
Excluded from the Bank of England’s figures now are student loans. The reason given is because they do not behave as other loans. However the total student loan stock doubled in the five years to April 2012 to £47 billion, almost as much as the total outstanding on credit cards. Soon, it will top it. This burgeoning debt among those leaving university will no doubt have a knock-on effect on the housing market, as it has in the United States, where student debt recently topped the one trillion dollar mark.
David Cameron was famously forced last year to change his speech at the Conservative Party Conference. Instead of saying that people ought to pay down their credit card debt, he ended up saying that they were doing so. It was not correct then and it is still wrong now. The appetite for debt may be less ravenous than it was, but taking on new borrowing at a slower pace does not help to decrease the total of outstanding debt. Eventually these loans must, somehow, be paid off. In the meantime, the continuing need to pay the interest diverts money that would be better employed elsewhere.
Whatever the impression given by the Bank of England, British households remain among the most indebted in the world and the notion of significant deleveraging is misleading.