High credit card debt in UK

The Straits Times
Dec 1, 2008 | 8:37 AM
High credit card debt in UK

LONDON - AS JOBLESSNESS spreads in Britain the government has a new problem to tackle - soaring individual credit card debt, which is more than eight times higher in Britain than in France, Spain, Germany and Italy.

Free-spending Britons have the highest credit card debt of 14 European countries studied by the Datamonitor research group, prompting the government to meet with credit card companies on Wednesday to look for ways to ease the pain for borrowers falling behind in payments.

The goal is to avoid a rash of personal bankruptcies and credit problems that could make economic recovery more difficult.

The government is urging credit card companies to lower interest rates - which have actually gone up over the past six months despite cuts in the Bank of England base rate - and to set more generous terms for people who miss payments.

British business secretary Peter Mandelson, angered by steep rises in credit card interest rates, summoned bosses of credit card companies to a meeting to ask them to change some of their practices.

'Many people feel stitched up by credit card lenders and there are definitely pockets of bad behavior,' Mr Mandelson said in an interview with the GMTV breakfast show ahead of the summit.

'I want them to accept voluntarily a code of good behaviour.' Mr Mandelson called on credit card companies to allow troubled borrowers to delay making payments without incurring added fees.

Mr Gareth Thomas, Britain's head of consumer affairs, who is chairing the credit card summit, said he hopes to come to an agreement with credit card companies.

'The government is deeply concerned that borrowers aren't getting a fair deal,' Mr Thomas told wires agencies.

If credit card companies do not agree to change some of their practices, Mr Thomas said he would not shy away from asking the Office of Fair Trading to investigate them with an eye toward imposing fines and revoking licenses.

But although the proposed code promises to help consumers keep up with payments through the economic downturn, it won't reduce Britons' level of indebtedness to credit card companies.

Britons' propensity to pay for everything from washing machines to weddings on their credit cards has led to the average person having 1,349 euros (S$2,639) worth of outstanding credit card debt as of the end of last year, according to Datamonitor.

That compares to an average outstanding credit card debt level of just 156 euros in Germany, France, Italy and Spain.

In Datamonitor's research - which covers fourteen European countries and the United States - only Americans had higher credit card debts than Britons, with the average American owing 1,481 euros.

'Like with many things, the British have developed more along the American line than the European line in terms of credit culture,' said Datamonitor analyst Kieran Hines, explaining that the credit card industry is much more developed in Britain than it is in continental Europe.

When the British economy was booming in the last decade, the high credit card debt wasn't a problem because most paid off their bills each month. That has changed as more people lose their jobs and need to cope with high inflation and food costs.

The problem is compounded by rising interest rates - the average annual credit card interest rate is now 17.6 per cent, up from 17.2 per cent in May, according to banking research company Defaqto - despite the fact that the Bank of England has cut the base rate from 5 per cent to 3 per cent over the same period.

Credit card companies say they had to raise interest rates as their own borrowing costs have gone up because of the credit crunch.

The risks of lending money have also increased, they say.

'The bank's interest rate can play a factor in determining credit card APRs, but it's not the only factor,' said Ms Michelle Whiteman, spokesman for APACS, the industry group that represents Britain's credit card companies.

That explanation does little to help Britons struggling to keep up with their credit card bills as the economy contracts.

Ms Megan Sadler, a 24-year-old administrative assistant, said she has trouble paying her debt of nearly US$3,000, spread across three cards.

'I can pay off the interest on my credit card bills with my salary, but then I need my credit card again to pay for food,' she said. 'It's a horrible cycle. If I lost my job, I don't know what I'd do.'

Credit Action, a charity that advises people about debt problems, has seen the number of people coming to its web site for help double in the last three months, said Director Chris Tapp.

'As more people lose their jobs, people who already have existing credit card debt are struggling to make those payments,' Mr Tapp said.

'Some are even needing to look at bankruptcy.' -- AP